Balance and Manage Risk and Reward

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Balance and Manage Risk and Reward  :

Introduction :
Under this topic we are going to learn how to balance our Risk and Reward and how to manage Risk and Reward in simple way with proper example and importance of Risk and Reward Management.

In any type of business the investor enter to earn more money.
No one likes to loose its hard earn money.
But the fact is that, not every one earn as they want to earn.
There may be several reason for loss.

Understanding Reasons for Losses in Stock Market :
Here we are going to discuss on investment done in Stock Market and Why losses happen to them?

There may be several reason for losses in Stock Market.
1. Entry at high price.
2. Company Business not understand by investor.
3. Political and Geo Political circumstances.
4. FII's selling.
5. Currency and Crude movement.
6. Company bad performance.
 and so on many many reasons.

We don't understand and even don't evaluate this circumstances, may be due to shortage of time or due to lack of knowledge.

And this is true, 90% of investor falls prey to any one or more than one of the above reasons and which cause huge losses to poor investors.

How to Control this Situation :
Please note that profit and loss are the two parts of trading, as two faces of coins.
If someone makes profit it means someone made a loss on that trade, this is very clear.

But we have one remedy to control losses.
Losses can be controlled by predefining our Risk and Reward level.
Everyone of you will agree with me that, we will be in Stock Market only if we have saved our money from loss. And if we have saved our money from loss than we can come back again and cover up loss and gain profit. But  if money completely eroded than we have no chance and we have to leave Stock Market.

So Decision is with you to minimize your loss and save your money and convert it into profit or blindly only wait for profit even incurring loss without cutting your position.

Understand and Manage Risk and Reward :
Losses can be controlled by predefining our Risk and Reward in our trade.

But what is Risk and Reward?
Suppose Person A having Rs.10 with him for trading and he want to earn Rs.2 in it and ready to accept loss of Rs.1 i.e Risk of Rs.1 for Reward of Rs.2. And this known as Risk and Reward Ratio of 1:2.
To be more clear Person A will keep his position upto Rs.9 in case of loss and wind up its position at Rs.12 in case of profit.
For safer side in case of fall of price below Rs.9 the position automatically wind up. And this tool is stop loss. Person A have keep its stop loss at Rs.9 and position close by Rs.8.95.
If unfortunately Stock Market moves in one direction ie negative direction than it might be possible that all of his money get eroded and Person A will be left empty handed and get out of Market.
Hence to be remain in Market always protect your money first and then think about profit.

Conclusion :
Risk and Reward should be predefined according to ones ability to take risk. May be 1:2, 1:3, 2:5 as per individual capacity. But this Risk and Reward to be incorporated and implement in our strategy.
Discipline is the key of success in Stock Market. It may be discipline in Loss acceptance or discipline in Profit capturing.

Disclaimer : This article is only for knowledge and information sharing and not for any type of  recommendation.