Share Market Toolbox
One key aspect to protecting our investment capital
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Share Market Toolbox
Related links: Robert's Philosophy; Share Market GEMs; Share-Market-Ready;
Stop Loss; Optimising position size; Exit Strategies; Stop Loss; Technical Analysis;
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Paper Trading; Market Indexes; Support and Resistance;
Trend-spotting; Funda-Technical Analysis; Sensible Investing; Contrarian Investing Redefined;
Risk management? - How/why so?
When investing or trading in the share market, it is important to be aware of the risks involved, and to minimise the likelihood of adverse events occurring. With appropriate risk and money management, the share market is not as scary, or as frightening, as some people might believe it to be, and we can “sleep at night”.
One way to tackle this is to look at all the things that could possibly go wrong, and then work backwards to consider how to mitigate these events - that is, perform a risk analysis to identify the risks, and then consider the strategies to mitigate the risks. We won't actually do that on this page, but the following discussion addresses the mitigation aspects. A discussion on Risk Management with a risk analysis is included in Brainy's eBook Article ST-4000, "Risk Management" (see More information links at right).
Money can slip away - brokerage, commissions, slippage
There are two things that can easily eat into profits:
Depending on the size of trades, and the time the position is held, these items can eat away at the investment capital. Of course, larger position sizes can reduce the impact of brokerage fees and slippage. Some people might suggest that a parcel size of at least roughly $1500 will help to mitigate these costs.
We will be wrong
One very important thing to understand is that it is not possible to be 100 percent correct with our investment decisions. This is difficult for some people to come to terms with - especially those who are professionally trained in some fields such as engineering, maths or science. You see, the field of Technical Analysis is not an exact science - there is an amount of "art" involved.
Some studies from some of the profitable experts conclude that a win rate of only 40 percent can still result in profitable outcomes. Provided we cut our losses quickly - to minimise the losses - and let our profits run. Provided we have wins that are larger than our losses, then the Win to Loss Ratio of 4 to 6 can still be achieved.
Good money management
There are a number of strategies that can be employed to manage the investment capital in a sensible manner, including:
Many investors still persist with the long-term buy-and-hold approach for share market investing. However, there are more and more investors who can see that in today's market conditions, such an approach may not be the best one. Many investors are comfortable with selling some shares in order to protect their capital. But on what basis do they decide to sell? This is not straight forward, but they carefully pull together an Exit Strategy, which might be a simple Stop Loss approach. Read more about Exit Strategies...
A good Exit Strategy is very important in case the investment starts to go against us, so that we might cash in the position before too much is lost. One particular, and rather simple Exit Strategy, with share market investments is the humble Stop Loss - where we might determine a share price value before we enter the position, and if the share price falls to that level then we sell without question. This removes the emotion from the situation, and removes any discretionary aspect. See more about Stop Loss...
Gauge the mood of the market
Now this is not an easy topic to get one's head around. But let it be said that if one has a feeling for the overall mood of "the market", then one won't be surprised when the market behaves in a particular way.
For instance - in early 2008 many technical analysts were not surprised when the world's markets crashed and suffered a bear market. By being aware of the overall market mood, these analysts were able to confidently implement capital protection strategies. Don't forget that a market correction, or bear market, comes around about every 4 years. Don't believe it? See more details...
There are many ways to gauge the mood of the market. Just one method in the charts is to watch for bearish divergence. See more details about divergence (bearish and bullish)...
For more information on these topics, refer to the web links above, and the references in the top of the right hand column.
Information in this
Share Market Toolbox:
Also eBook Articles - More details can be found in Brainy's eBook (PDF) articles, some of which are reserved for Toolbox members::
The Share Market - more information about the market and investing and trading.
The toolbox is an arsenal of weapons to help you tackle the share market.
See a list of contents on
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opinions of the web page content owner, and
are not recommendations or endorsements of any product, method, strategy, etc.
For financial advice, a professional and licensed financial advisor should be engaged.