Risk Management Methods

Learn these risk management techniques and increase your income. Apply the methods to your writing or consulting business, your general finances, or your investor-trader gig and you’ll grow your net worth.

Regardless, risk control should be part and parcel of any business or income-producing venture. Minimizing losses is maximizing profits in any entrepreneurial, creative, or fiscal journey. Whether trading or investing or injecting capital into your small business implementing these effective rules and practices is crucial for long-term success.

Free lesson from the ranks of successful equities traders; risk management and risk control are crucial aspects whether managing a trade or operating a business. Good risk control involves self-imposed rules, procedures, and practices to minimize potential losses and protect capital investments.

Draw on Owner’s Equity

If you’re starting a new gig or small business, injection of initial working capital — often your own hard-fought savings — should be guarded not just protected. Unplanned equipment, supplies, or inventory requirements are inevitable but you’re only just started the business! Differentiate between needs and nice to haves when the business is young.

Keep your overhead lean and mean. Only critical Cost of Goods (COGS) debits from your owners equity or credits from cash should be allowed. As an equities trader, #1 vital rule of survival is: Define the initial position size.

Likewise, a risk control rule should be established in a business: Don’t expand your initial business plan unless the new expense goes straight to the COGS or value of your product and sales. One wise writer here articulated the principle as follows: “I limit my expenses not to exceed my income.”

Initial Position Size

Implement the Initial Position principle of risk management technique as a strategy that can minimize losses and maximize profits in your journey. Implementing effective business risk rules and practices which are common to equities traders is crucial not only for short-term profitability long-term success. Think lean and mean.

Trade risk management is the practice of not getting-in over your head, or not meaning to. In the middle of an equities trade, without a hard rule specifying the Initial Position Size allowable, a trader becomes oblivious to the risk, until a giant wave comes against the trade.

This goes for a new small business owner. A new owner might find himself dreading the approaching monthly overhead expense groping for an edge, for a profit, when the initial cash outlay was too large for the business.

Risk Control involves implementing various rules, procedures, and practices to minimize potential losses and protect valuable capital.

Traders should carefully assess their risk tolerance and set limits on the percentage of capital they are willing to risk on a single trade. This ensures that no single trade has the potential to wipe out a substantial portion of their account.

Averaging Down

Additionally, a business owner or trader should establish limits on “averaging down”, which is the practice of buying more of an asset as its price decreases. Unforeseen bargains for equipment or initial inventory in a new business can create opportunity to average down your initial business start-up cost. Okay, grab it! But don’t then use the opportunity buy more nice-to-haves. Instead, move the created or unforeseen savings to Cash on the Assets side of the accounting equation.

Invariably, in a trader’s market, new or existing orders not considered within stock chart analysis can move the premarket or morning price up or down from the prior close. If the price temporarily opens 5% down with no causal news, and your trade method is still valid, a trader may take advantage of the “bargain price” and double his or her initial buy. This is called Averaging Down because adding to your position lowers your cost. Great, grab it. However, don’t use this good fortune as an excuse to now expand your position size for greater profit. When prices recover to normal, take the short-term gain off the table and bank roll it!

Beware! A trade or business venture can go sideways by applying this principle to faulty trade method, chart analysis, or business plan and continuing the practice, tripling down can be tempting. Consider that your business or trade environment may have changed from what it was or what you envisioned. Like a trader who must protect capital at all cost, set limits to avoid the common pitfall of continuously adding to a losing bet or venture or position, which can lead to significant losses.

Premarket Gaps

Another risk to consider is the pre-market gap, which occurs when a stock’s price significantly changes overnight. This is always a possibility which can work against or in a Trader’s favor. But we’re not in this business to profit from luck! So, let not the potential for a gap up (in favor of a trade) become a strategy or part of one.

Traders should be aware of this risk and consider NOT holding certain positions overnight or implementing a stop-loss order to “punch out of the aircraft” in the event of a gap down. Of course, a trader can add the frequently occurring gap scenario and average down approach to the Trader’s Method. Or finally, a trader may opt to avoid premarket trades altogether.

By adhering to these risk management principles, new small business owners like equity traders can protect their precious capital and increase their chances of long-term success.

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