Brainy's Share Market Toolbox Brainy's
Share Market Toolbox
(public information)

Risk management

One key aspect to protecting our investment capital
is to carefully consider key aspects of risk management.

You are here: Share Market Toolbox > Share MarketRisk management
Related links: Robert's Philosophy; Share Market GEMs; Share-Market-Ready;
 Stop Loss; Optimising position size;
 Investing problems?; Investing and Trading Tips; Sharemarket Success Secrets;
 Paper Trading; Market Indexes; Support and Resistance;
 Trend-spottingFunda-Technical Analysis; Sensible Investing; Contrarian Investing Redefined; Technical Analysis;

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:

  • Brokerage (or the broker's commission), which is payable on each trade.
  • Slippage - A small amount that reflects the actual buy or sell price compared to what was your "desired" or "intended" buy or sell price.
  • Interest on borrowed funds.

Depending on the size of trades, and the time the position is held, these items can eat away at the investment capital.

Good money management

There are a number of strategies that can be employed to manage the investment capital in a sensible manner, including:

  • Proportion of capital - 20% - Putting no more than a specific amount of the investment capital into any one investment position. One often talked about figure is 20 percent of today's capital.
  • The 2% Rule - Allowing no more than a specific portion of trading capital to be "at risk". That is, if you want to invest for capital increase, and a position starts to go the wrong way, and you close the position, then the amount lost on this trade was the "amount at risk".
  • Position size optimising - Very small position sizes (eg. $500) are just too small, because the brokerage will be a significant portion of the position, and the investment will need to work very hard just to cover the brokerage costs.

Stop Loss

A very important approach to consider is that if the investment starts to go against us, then we cash in the position before too much is lost. With a share market investment, we ought to determine a Stop Loss value before we enter the position, and if the share price falls to the Stop Loss 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)...

More information

For more information on these topics, refer to the web links above, and the references in the top of the right hand column.

More information

Information in this Share Market Toolbox:
Also eBook ArticleseBook Articles - More details can be found in Brainy's eBook (PDF) articles, some of which are reserved for Toolbox members::

Robert writes information from time to time about the market and investing. If you are not a Toolbox Member, you can register to receive useful free information as it is published.
Click here to register interest
For Email Marketing you can trust
Privacy ensured, unsubscribe anytime.
See the Testimonials - the things that people say about the Toolbox and more.

The Share Market - more information about the market and investing and trading.

Brainy's Share Market Toolbox
The toolbox is an arsenal of weapons to help you tackle the share market.
 
See a list of contents on
the Toolbox Gateway page.

Robert Brain provides various support to both new and experienced traders and investors.
Who is Robert Brain?

Beware the sharks in the ocean.
And whatever you do,
beware of the sharks in the ocean!

This is one of the many tools in Brainy's Share Market Toolbox.

The information presented herein represents the 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.


Home | DISCLAIMER | Contact us
Copyright 2013-2016, R.B.Brain - Consulting (ABN: 52 791 744 975).
Last revised: 11 April,  2016.