During coronavirus pandemic that leads to chaotic economy, risk management in trading becomes more important than ever. Traders will need to closely pay attention to it, especially since the market volatility is at its peak since 2009 according to VIX Index.
Risk management is a practical strategy that may identify possible risks and mitigate them to prevent a series of losses. Additionally, the strategy also helps traders maximize their returns.
While the pandemic rampages, do traders need to have special risk management strategies? The answer is not, but they need to focus on the following aspects.
Open Position and Position Sizing
Knowing when to open your trade and the size of your position determine the amount of money you can make and lose. By understanding the proper one, you can maximize your trade appropriately.
Accordingly, to monitor your open positions, you have to stay up-to-date with companies quarterly reports (which usually come in April). Also, a good rule of position sizing advises that, in each trade, you risk no more than 3% of your account.
Stop loss is highly beneficial as it can immediately stop your trade when it reaches a certain level. The benefit of this tool multiplies when the market is volatile like today.
During the pandemic, you have to cautiously trade and adjust your stop loss by considering the size of intraday movements. The best advice we can give is to widen your stop loss soon.
During normal trades, traders mostly exploit leverage to potentially earn bigger returns. Logically speaking, higher leverage translates to higher chance of gaining bigger profits.
However, as you might also know, leverage can also lead to your demise as you can lose more than you invest. Particularly, during this uncertain period, the probability of losing might unpredictably increase. That said, reducing your leverage may be the best strategy to use for now.
Writer: Doddy D. Wahyuwono
Also Read: The Importance of Risk Management in Forex