?Many people are drawn to stock trading as a business. After all on the surface it appears to be the perfect business. I remember the first time I learned about stock trading and how I thought that it was truly amazing to be able to make money from anywhere in the world where I had access to a computer and/or telephone. Some of the unique benefits include: · no employees · low overhead · no physical inventory · instant liquidity · independent of economy · independent of climate People are drawn to stock trading for various reasons. Your reasons might include: · Making additional spending income · Produce capital for other investments such as real estate · Saving for your children's education · Becoming self-employed as a full-time trader · Building your nest egg for retirement The Most Important Consideration in Stock Trading Stock trading involves purchasing stocks with the motive of earning a profit in a relatively short period of time. This means that in order to increase your chances of making a profit, you should try to follow a proven strategy(s) that will help you grow your capital. A stock trading strategy includes risk control policy, money management, the method of entry and exit and also stock selection. The fact is a good stock trading strategy is only effective if it fits your individual personality. Why is that?. Because in the long run, you will usually abandon anything that doesn't feel natural or comfortable. In order to choose a stock trading strategy that fits you, it is necessary that you become familiar with the different types of strategies traders use with the most important difference to evaluate being the amount of risk involved. What does that mean? It means that the strategy of your stock trading business should depend primarily upon the type of risks you are willing to take. In general; the lower the risk the lower the return however the desire is typically for higher returns which then always involve higher risks. Ideally finding a happy medium regarding risk and return will create a lucrative environment for growing your stock trading business. Coming to term with the Risks of Stock Trading Understanding the fundamental fact that risk, as it pertains to stock trading or anything else, can never be eliminated; the best you can do is manage risk. An even so-called "risk free" investment such as a bank savings account runs the risk of the cost of living growing faster than the purchasing power of the account. Therefore good stock trading strategies should always include defined risk management strategies. More specifically, stock traders can manage risk in five ways: 1. Assuming risk - A trader assumes risk by entering a stock position or by not entering a stock position. The second scenario is assuming the risk of "lost opportunity". 2. Avoiding risk - A trader avoids risk by not entering the market at in-opportune times. 3. Transferring risk - A trader transfers the risk to others when he exits a stock trade. 4. Reducing risk - A trader reduces the size of his stock position or uses stop-loss orders or options to reduce risk. 5. Distributing risk - A trader distributes risk by trading various types of different companies, sectors, countries etc. vs. trading only one stock. By understanding the risks involved and how they should be managed, you will not only be able to build a stock trading business that fits your tolerance for risk but also one that is profitable. Kevin Brown is an independent trader, author, and trading coach. His new book, The Definitive Guide to Swing Trading is available at . Kevin can be reached at inquiries[at]swingtraderguide.com and is available to speak at trading related events or for media commentary and interviews regarding his market insights and innovative trading strategies.
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