Trading is a difficult professional so having an understanding of how to manage your risk will help you keep money in your account. All top traders use strict guidelines to manage their accounts and so should you, so check out the important steps below in managing the risks of trading.

Placing Hard Stops Versus Mental Stops

One of the widely used techniques in reducing the amount of loss from poor performing stock is to put an order to the broker to stop the loss. In a hard stop, the trader pre-places a stop order when s/he invests in a stock.

This helps the trader have system monitored profit/loss take. When the market price falls below to the level set by the trader, the system will automatically stop the trade and thus helping the trader to avoid incurring further losses. This is not the best option if the stock is on a temporary price decline. However, for poor performing stock, this is the best way to avert further losses.

The other option available in stock trading to help traders deal with non-performing stocks is placing mental stops (also known as soft socks). Soft stops are preferred where the trader executing the trades is well informed about the market; s/he has very good market analytical capabilities and is able to correctly predict the market. In this scenario, the trader personally monitors the stock as it trades and makes a stop-loss command when s/he is convinced that the stock cannot do any better.

One advantage of using mental/soft stops over hard stops is their ability to allow the trader to evaluate their profit making probability before stopping a declining stock. However, where the trader lacks the required capability to identify the best exit point, s/he is likely to make huge losses from stock.

Hard stops are preferred in highly volatile markets. For long-term traders, mental stops are the best. However, short-term traders need to go for hard stops. It’s important to note that both mental/soft stops and hard stops are designed to help the trader in managing risks associated with trading.