Risk management unlike trade management covers a broad spectrum, right from the vagaries of the weather to political uncertainity, from a company's Q results to macro-economic performance, from a crashing hard-disk to a dead phone.
All of the above pose risk in some way or another to the investor/trader. While powerless to avert any of these, we can still have a disaster-mangement strategy in place, by way of back-ups, arrangements with brokers, alternate means of contact, and of course, stop-losses. Above all it is absolutely necessary to be aware that every next day can be totally unlike anything that we have experienced till today, ie., not to become complacent.
Risk management and trade management overlap in some ways, mainly stoplosses, position-sizing and exposure limits.
One has to decide as to the maximum amount one would risk on a single trade. Then, to decide if it would be the same for all trades at all times or would be reduced as circumstances warrant. Also to decide the number of trades one would enter into concurrently, ie., how much would one's total exposure be at any time in the market as a whole.
If one does day-trading and also holds positions in the F&O or goes in for delivery-based trades too, the capital has to be apportioned accordingly. With margin, this has to be doubly so. Emphasis is on preserving capital even if one were to suffer a long string of losses without any reprieve.
Under risk management one has to always consider the risk to reward ratio of any prospective trade. One could decide that one wouldn't trade any setup that has a ratio less than 1:3 or 1:4 or something similar. One could also decide that one would exit a trade, especially options, that hasn't moved as expected within a certain period of time.
By trade mangement, I mean determining the kind of order, the entry point, a viable stop-loss (including if one should let the SL trigger into the market or only within a fixed price), deciding on partial booking of profits or going in with a trailing stop, moving the stop-loss constantly as the market favours our entry, and above all to revise plans and even make a speedy exit if one is convinced that market conditions are turning unfavourable.
It is gratifying that a senior member has sought elaboration on these issues which is the foundation for an aspiring trader's career. Hope I have made myself clear, CV.
pksam
