Stock markets are getting driven irrationally. Value buyers are looking for opportunities in contrarian positions. Where they expect the stocks as value buys to be available at a discount and expect them to turn around and trend upwards with time. However, the biggest risk they are taking is by making the assumption. What if there is a fundamental drift in the industry? What if those stocks may take longer than expected time to start trending upward? What is the level of patience an investor or a trader must have? There are plenty of such known and unknown risk!
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Trending Stocks Risk Management
One of the most important aspects of taking a position in a trending stock is to manage the risk. If an investor or a trader wishes to ride the trend, then first of all, they should be in a position to spot the trending stocks at the right time. Below, we will see a three-step process of managing risk in a trending stock. First, let’s identify the list of risks that an investor/trader must consider while taking a position in trending stocks.
- The biggest of all is the risk of getting manipulated by operators
- Trending stocks are typically highly volatile
- Investors try to time the market
- Investors jumps into the trend due to FOMO
- If a micro or small cap then liquidity issues will restrict exit
Let’s see how can we manage each of the above-listed risk in trending stocks.
Stop loss orders:
One of the most effective ways to manage risk in trending stocks is to set the stop loss at the same time when you are taking a position in the stock. This will create the first layer of protection. It’s one of the most underrated but most effective ways to manage risk in any stock. However, it has its nuances, like what if the market gaps down below the stop loss limit? What if a stock, due to high volatility, just hits the stop loss and reverses immediately?
Position size:
This is one of the most effective ways to sleep at night without any worry or tension while taking a position in a trending stock. With position sizing, you limit your overall loss by that much quantity that you are ready to lose in a trade. This will allow you to manage your position very effectively. It will improve your volatility digestion power. You will be able to stomach higher volatility as well as increase your patience level.
Trending stocks on halt:
Identify those stocks that are trending in a direction, in our case, it’s upward. However, they have taken a pause. Typically, such stocks can be identified when, on higher timeframes, they are creating patterns of bullish trend however, on smaller timeframes, they are building patterns of sideways. Such stocks can be easily filtered out using trend reports. Further, combine position size strategy with this list and see the magic of improving overall profitability in the stock markets.
Avoid emotional decisions:
One of the most common syndromes with traders is FOMO. Once they find a stock trending upwards they tend to jump in without considering the fact same stock would give a better opportunity to enter at a later stage provided they choose to continue trending upwards. In that case, if their position is not sized appropriately, it will impact the trader/investor emotionally with fear of loosing.