Speed equals Risk - 5 tips for staying on top of things
Equity markets have come a long way in 2009. And now everybody wants in on the move and everybody wants to own stocks since they are moving up. That describes the same situation we faced at the start of the century after Dotcom stocks moved over the edge. Sure this time the situation is different, we are in the middle of one of the worst crisis we have seen so far and it is an event felt worldwide. But that doesn´t mean stocks can go up forever.
The economy is not following nearly as quickly as markets suggest. The stock market has outperformed the real economy by far. So what do we need to do in this environment thinking about our risk management process.
- Stocks have risen and so have our profits. Many traders size up on their positions in this environment but we need to make sure to keep our position sizes to a level our account can bear. Connect all your position sizes to your account do not let any position get out of hand. As a general advice never invest more than a maximum of 30% in any single position.
- Use stops for all positions especially when positions stay overnight. Having no stop in place is calling for trouble. Markets can fall quickly and therefore all positions in the account need to be protected.
- Diversify your trading, don´t get stuck with a single industry. For example trading only technology stocks is not a good investment. If technology were to fall, all your positions will lose, so make sure that when you trade you diversify your risk across the board.
- Don´t get caught in overtrading. In an environment where stocks are moving higher every day it is easy to get tangled up trading all things you see out there. Stick with your main investment objective. Come up with a plan on how much you need to win in one month and then stick with those numbers. Don´t try to gain more than markets are able to give you.
- Rethink your strategy. Are all stops in place? Are you using risk management procedures? Are you using the correct position size? How is your money management doing? Make sure that you have a plan and that you stick to that plan. Don´t deviate from that just because there are some news about a new product, another company dodging bankruptcy or anything else that could be a new idea to be traded.
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