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Technical Analysis Introduction

Risk Management

Technical Analysis Basic Any time you trade, no matter what technique you are using, there is a risk. The main rule of risk management is: never trade with money that you cannot afford to lose. It is essential to have a solid risk management strategy. Each strategy is very individual and depends on the investor’s objectives, time horizons, risk tolerance, and experience. Risk management must be part of your core trading strategy.

An important part of risk management strategy is asset allocation. Don’t put all your eggs in one basket. Usually when some asset classes are down, other classes are performing well. Diversification is a real benefit here. The goal is to spread your money between different asset classes like bonds, growth and value stocks, real estate, commodities, and precious metals in order to avoid taking too much risk in just one asset class.

Limiting the downside risk should be at the core of your risk management strategy. One of the easiest ways of protecting yourself against inefficient trading is by using stop losses. Another way to use stop losses is to lock in profits. This technique is referred to as a "trailing stop."

It's important to understand that stop-loss orders can be a double-edged sword. There is a risk that short-term price fluctuation could trigger an unnecessary stock sale. The stop loss strategy should allow a stock price to fluctuate. Another disadvantage of stop loss orders is that in a fast-moving market, the sell price may be very different from the stop price.

Trading discipline and the ability to control your emotions is critical for trading success. One of the best ways to promote discipline, as a trader, is to create a trading plan. Using technical analysis tools can help you to create a trading plan and decide when to buy and when it is a good time to take profits. You need to be able to stick to your plan, where you are confident when to take profits and when to execute a stop loss. Your emotions should not get in the way of making your trading decisions.
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