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What is Risk in Market?

The risk means the potential loss of any type of investment. Entering the world of trading, it is impossible to avoid risk and perform rational calculations, and invest more intelligently, we must always consider a certain percentage of risk. Some people think that risk means market fluctuations or the gambling movements of some traders; While risk, in its main form, refers to uncertainty.

 

 The importance of the risk determination

Therefore, all those who deal with business, should pay special attention to it and understand the concept of risk well, because otherwise there will be dangerous consequences. Risk in various assets, as well as for the management of micro and macro capital, includes a wide variety of components. Many believe; Due to the nature of the capital market, which is inherently concerned with money and speculation; A deep understanding of this concept is one of the basic requirements for successful trading in this market.

 

Types of risks in the stock market

Risks are divided into different types. The financial market risks can be divided into two categories: systematic and non-systematic.

 

Systematic risk

Systematic risk is related to macroeconomic events, and political developments, and is not related to a specific industry or company. The most obvious feature of this type of risk is its unpredictability, because it is related to important and major events in the country or the world, and generally the final results and effects of these matters cannot be predicted and calculated. Traders should always be prepared for such events with clear defensive approaches, as they are likely to occur at any time and the severity and weakness of the effects of these crises are unclear. Examples of systematic risk include changes in interest rates, the effects of inflation, international sanctions, war, and so on.

 

Unsystematic risk

Unsystematic risk is caused by internal events in the stock market such as industry conditions, the general situation of the company, and the movements of major shareholders, and is largely predictable through the knowledge of market analysis. It can be said that these events are related to a specific industry or company and usually do not affect the entire market. The slightest change in their operating conditions is closely monitored by market participants and can cause sharp price fluctuations in the stock value of these companies. An example of this is the discussion of petrochemical companies’ feed-in tariffs in budget bills, which overshadow the stock prices of the chemical group. Changes in industrial fuel rates, corporate tax laws, export and import tariffs, board composition, and… are examples of unsystematic risk.

 

How to determine the risk for a trading position

One of the definitive and common principles of successful trading in the stock market is to determine the risk before entering the trade. To determine the risk of a trading position, we must first determine what percentage of the loss in each transaction will be tolerable and reasonable for us?

 

The ideal and recommended amount of risk in each trade is between 1 and 3%, which is recommended at the beginning of the trading process; Start with the same 1% or even less. In addition to determining the risk of each trading position, you must also have rules for permissible risk limits within specified periods. For example, you need to know the maximum amount of risk acceptance on a daily, weekly, and monthly basis that is reasonable to you and will not harm your long-term survival in the market. A trader may correctly determine and adhere to the risk of each trade, but this person trades several times during the day and in this case, there is no limit to himself! Suppose several of his trades end in a row at a loss; In such circumstances, capital management has not been applied in practice and a heavy loss has been incurred in the trading account. As a result, it is recommended that you determine all the details of your trading risk based on personal risk management and follow these rules.

Once the percentage of potential risk is determined, to determine the allowable volume of the trade, we must refer to the details of our trading strategy and calculate the entry and exit points and their distance from each other.

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