Trading in the stock market is similar to running a vehicle in a fast-moving high traffic area. You need to have skills acquired before taking up the task, should have pre-tested all your tools and resources and be on the alert while you are trading. The major risks involved with trading on the stock exchange are explained below along with possible remedy in each situation.

Sudden fluctuation of stock prices

Global parameters can change the stock prices suddenly and can go against your trade. For example, an unexpected increase in unemployment figures or a negative report, even a rumor about a specific company can bring down the prices suddenly. Stock markets across the world have many regulations so that any new, result or report that influences the market prices is not released during the trading period. Despite of this, market fluctuations can still happen. Also if you keeping the trade more than a day, these kind of influences can not be really avoided.

What can be done about this: Always have a stop-loss both at the trade level and your account level and come out as soon as possible to cut the losses.

Technology risks

This category is applicable especially for online trading, which is very common these days. A slow or stalled server at your broker's location, an outage in the network either at the exchange or broker's network or your home network, a power failure however uncommon you might think, can cause terrible losses because one can not come out of the trade as planned.

Some times the prices you see on the trading screen might be delayed because of server problems and your trade may end up in slippage or subjected to wrong decisions.

Counter strategy for technology risks: Have the telephone numbers of your broker house handy so that you can go the telephone route if needed.

Inherent market risks

You place a market order and the market may move suddenly causing your order to be filled at an extreme price. Or due to fast changes, your margin needs might escalate putting pressure on you.

What can be done: Use limit price whenever applicable and in case you use market order, think ahead for possible consequences. Use you margin sensibly and do not trade on borrowed capital.

Another inherent market risk - your order may not get filled if the liquidity is not good. Handing this risk lies in having a good trading system and following your rules.

Behavioral risks

If you are not an aggressive risk taker, your own reaction can become a risk in your trading. A quick reaction out of fear can spoil your trade. Judge before-hand whether stock day trading suits your nature and evaluate all possible parameters before taking up stock trading.

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