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How to make money on the stock exchange?

Undeniably, technology plays an important role in trading, although novices devote far too much time to it, which later suffers m.in budget management. Over time, it turns out that technical indicators do not give us a complete answer to how to play the stock market. Only mastery and skilful control of risk are the foundation of a good investment strategy. In this article, we will focus on what proper "money management" is all about.

Profit/Loss Ratio – RRR Ratio

It is worth calculating the risk properly, especially in the era of online trading,where it can get out of control particularly quickly. How does it work? The ability to conclude an unlimited number of transactions causes a rush of adrenaline and quick gratification. This contributes to the development of bad habits, through which the stock market game will be associated more with gambling than with a practical business idea.

Risk control distinguishes speculator from gambler

Human nature does not like discomfort. To protect ourselves from losses, we put the greatest emphasis on the percentage of effectiveness of the entrances. In the case of playing on the stock market, this is quite troublesome, because reality can show that we will regularly lose the invested funds, even with an effectiveness of 90%. This is not a completely rare phenomenon. The average retail trader usually realizes profits quickly while holding losing positions, or worse, subsidizes them.

In such cases, even the best stock market forecasts will not be able to protect against the loss of funds.

Profitability calculation

The aforementioned risk management, which distinguishes a gambler from a competent trader, is not the only factor. A good trader also relies on the calculation of profitability. As can be found in textbook knowledge from the basics of the stock exchange, the risk should not exceed 1 – 2% of the capital held.

A common mistake is to open a position with care to set a stop order, but neglecting the "take profit". Both elements are equally important. So if the chart says that the maximum risk return in a given situation may be 1R, then it is worth considering that it may not be worth placing an order.

Secure exchange

One of the biggest mistakes a trader can make is to focus too much on profit,while ignoring the so-called drawdown,i.e. slipping capital. The work of a trader on the stock market consists mainly in reasonable risk placement,and not, as most people think, multiplying the funds held. You have to ask yourself how many losses in a row our strategy can withstand and what damage the black series can cause.

To deal with this problem it is advisable to even be too sensitive, but this will allow you to prepare for the worst possible scenario.

Risk management through martingale

Martingale is a very popular risk management strategy, assuming doubling the stake in the event of a loss. Everything is based on faith in the end of the black series and earnings. This principle can and does work on "paper" and with an unlimited amount of funds, but reality shows that it significantly contributes to the "clearing" of accounts from financial resources. In this case, there is not even enough to count on quick earnings on the stock exchange.

At the opposite pole we have – and how – an inverted martingale. Following his suggestion, we double the stake in the case of winning, and halving in the case of a loss. So what is the problem with using strategies based on martingales? Such that they are more related to gambling than to stock market investments.

Nevertheless, some elements of such systems can be very useful. If we have a small account at our disposal, and the strategy brings regular profit, then we can double each subsequent stake by the funds earned in the winning series. Thanks to this, using a profitable system, you can further accelerate the growth of funds on our account.

A similar plan can be used with the right budget, conducting a thorough test of the chosen investment strategy in advance.

The best for this purpose will be to use a demo account to play on the stock exchange.

However, if we have more resources, then it's time to play seriously and create a more reasonable risk management system.

Author

  • Trainer in the field of finance, as well as a manager and speaker. She enjoys the development and success of her colleagues. He describes himself as an active, dynamic and organized person. Diagnoses the financial problems of his clients. After work, he rides a motorcycle and sails.

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