Real-Time Risk Management in the Trading Arena

Real-Time Risk Management in the Trading Arena

Vardaan CHAWLA

In this article, Vardaan CHAWLA (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2020-2023) shares a case study on real-time risk management in the trading arena.

As an individual investor venturing into the dynamic world of financial markets, it’s crucial to understand and implement effective risk management strategies. The following article, explores the key principles and techniques to safeguard your investments and navigate the potential risks.

Financial markets are very dynamic, interesting, and filled with opportunities and risks. Learning to manage risks in the always-changing world of financial markets is crucial. In the following article I discuss the effective methods to manage, navigate, and avoid risk while dealing in financial markets to help you make informed decisions and safeguard your money.

Understanding Your Risk Tolerance

The first principle of effective risk management is self-awareness. Before diving into financial markets one must assess one’s own risk tolerance meaning the amount of losses you are able to manage comfortably.

Ask yourself critical questions:

  • How much capital can I realistically afford to lose?
  • How would a significant loss impact my financial well-being?
  • Am I prone to emotional decision-making during market fluctuations?

After answering these questions you can start making your trading and risk management strategies and techniques. A very aggressive investor will be open to taking a high amount of risk with more potential results while a conservative investor will be the opposite, low risk with less potential returns. One must invest based on their own loss tolerance.

Core Risk Management Strategies

Once you understand your risk tolerance, equip yourself with these key risk management strategies:

  • Position Sizing: This describes how much capital is devoted to a specific deal. Starting small is a vital notion, particularly for novices. A typical place to start is with 1% to 2% of your entire portfolio for each deal. With a diversified portfolio, you can progressively raise position size as your experience and risk tolerance permits.
  • Stop-Loss: Stop orders are vital instruments for safeguarding your investment. To limit potential losses if the market swings against your position, a stop-loss order automatically sells an asset when the price hits a predefined level (lower than the current market price). It’s critical to create stop-loss levels that balance possible asset recovery with risk minimization.
  • Take Profit: Limit orders work similarly to stop-loss orders in that they automatically lock in profits by selling an asset when the price hits a predefined level (higher than the current market price). This lessens the chance of losing gains if the market turns south. To safeguard your earnings and resist the need to cling to a winning position for too long, use take-profit orders wisely.
  • Diversification: Avoid putting all of your money in one place. Distribute your investments throughout several industries, sectors, and asset classes. This lessens the effect that a fall in one asset will have on the value of your entire portfolio. Diversification makes your portfolio more stable and less vulnerable to changes in the market.
  • Risk-Reward Ratio: This measure contrasts the possible gain with the possible loss on a certain transaction. Seek for transactions where the possible profit margin outweighs the potential loss margin. A better risk profile is indicated by a greater ratio. Prior to making a trade, evaluating the risk-reward ratio will help you make well-informed judgments regarding potential gain vs downside.

The figures below illustrate how take-profit and stop-loss can be implemented for a given stock (Meta around August 15,2024). Two orders are sent to the market (at the same time): a sell limit order with a limit price of $290 and a stop order with a trigger price of $280. Note that it is not always possible to place both a limit order an stop order at the same time (it depends on the brokers or trading platforms).

In Figure 1, the stock price stays below the limit price and above the trigger price.

Figure 1. No order execution.
No order execution
Source: computation by the author.

In Figure 2, the sell limit order is executed as the market price reaches the limit price of the order; the transaction price is $290.

Figure 2. Take profit: execution of the limit order.
Take profit: execution of the limit order
Source: computation by the author.

In Figure 3, the sell stop order is executed as the market price reaches the trigger price of the order; the transaction price is $280 (or lower if the market is not very liquid).

Figure 3. Stop loss: execution of the stop order.
Stop loss: execution of the stop order
Source: computation by the author.

Advanced Risk Management Techniques

As you gain experience, consider incorporating these advanced techniques:

  • Hedging: This is the process of offsetting possible losses in your underlying holdings by employing derivative instruments, such as option contracts. Before putting hedging methods into practice, careful thought and comprehension are necessary because they can be complicated.
  • Volatility Targeting: This strategy modifies the overall risk exposure of your portfolio in response to fluctuations in the market. You may lower the sizes of your positions or devote more capital to less volatile assets during times of high volatility. On the other hand, you may decide to take on larger positions or invest in riskier assets during times of low volatility.

Disciplined Execution: The Key to Success

Risk management is not just about having the right tools; it’s about disciplined execution. Here are some essential practices to cultivate:

  • Trading Plan: One must work meticulously in developing a comprehensive trading plan that clearly defines your entry, exit, risk management strategies, and what you aim to achieve from trading and avoid emotional and impulsive decision-making.
  • Monitoring and Adjustment: You must also regularly monitor your portfolio and be updated on financial news in order to prepare for potential future losses or opportunities. To maximize your gains utilize Stop loss orders and take profit orders and adjust your trades and position as and when needed.
  • Emotional Control: When we receive surprise losses or surprise gains we are inclined to make emotional and impulsive decisions that can lead to further future losses. The trader must always make decisions with a calm composed mind to make sound decisions.

By adopting these risk management principles and maintaining disciplined execution, you can navigate the real-time financial markets with greater confidence and minimize the possibility of significant losses. Remember, risk management is an ongoing process that requires constant evaluation and adaptation.

Related posts on the SimTrade blog

   ▶ Federico DE ROSSI Understanding the Order Book: How It Impacts Trading

   ▶ Jayati WALIA Quantitative risk management

   ▶ Ziqian ZONG My experience as a Quantitative Investment Intern in Fortune Sg Fund Management

   ▶ Michel VERHASSELT Risk comes from not knowing what you are doing

Useful resources

SimTrade course Trade orders

Justin Kuepper (June 12, 2023) Risk Management Techniques for Active Traders

Amir Samimi & Alireza Bozorgian (2022) An Analysis of Risk Management in Financial Markets and Its Effects, Jounrnal of Engineering in Industrial Research, 3(1): 1-7

About the author

The article was written in December 2024 by Vardaan CHAWLA (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2020-2023).

My internship experience at Talent Carriage

My internship experience at Talent Carriage

Vardaan CHAWLA

In this article, Vardaan CHAWLA (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2020-2023) shares his experience as a Business Development intern at Talent Carriage a human resource shared services startup in New Delhi, India.

About Talent Carriage

Talent Carriage is a New Delhi-based startup that brings innovation to Human Resources by specializing in Human Resource Shared Services (HRSS). It was launched with the vision of simplifying HR processes for small and medium organizations, they offer a unique solution for businesses seeking efficiency in their human resource process and cost reduction.

Logo of the company.
Logo of Talent Carriage
Source: the company.

What is shared services: Talent Carriage was established with a focus on the evolving needs of modern workforces and companies, Talent Carriage leads the shared services model for HR for medium and small-scale companies in India. This model centralizes all common HR tasks, such as administration, payroll, benefits, and recruitment processing, into a centralized unit. Centralization of all common tasks helps free the organization’s HR professionals and allows them to focus on more strategic and big-picture tasks like the growth and development of their employees.

Benefits for Businesses of All Sizes: Even though Talent Carriage’s services are well suited for organizations of all sizes their core offerings are inclined towards startups and growing businesses. They prioritize streamlining processes and the use of flexible technology which can help organizations reduce costs.

This shared services has three great benefits:

  • Increased Efficiency: In order to improve efficiency and eliminate redundancies for the client. Talent Carriage helps the client to centralize their HR processes like payroll and benefits. With such redundant work out of the way, the HR personnel have the time and capacity to lead strategic initiatives that help in the company’s success.
  • Standardization and Consistency: The shared services model also leads to consistent HR practices across an organization. Businesses with multiple locations and/or departments derive great benefits from HRSS.
  • Enhanced Employee Experience: The employees have a single point of contact for all their HR inquiries. This centralized approach leads to a smoother and more efficient experience.

Three-Step Engagement Model: Talent Carriage implements its HRSS solutions in an organized manner. Their three-phase approach of interaction includes:

  • Suggest: Consulting with the customer to ascertain their unique HR needs and objectives constitutes the first step. Then they analyse the organization’s current HR processes and recommend a suitable shared services model for them.
  • Implement: After a plan is finalized by both the client and talent carriage. It is Implemented and Talent Carriage trains staff on the new processes and help with a smooth transition.
  • Maintain: They also offer continuous support to the client organization. Talent carriage’s work goes far beyond initial implementation to ensure the success of their HRSS model within the organization. They also provide technical assistance and monitor for ongoing problems and optimization opportunities.

By leveraging Talent Carriage’s expertise in HRSS, businesses can achieve significant improvements in efficiency, cost-effectiveness, and employee experience.

My Internship at Talent Carriage

In the summer of 2023, I did my internship at Talent Carriage. There I had the opportunity to explore the exciting world of HRSS and business development (BD). Talent Carriage is a dynamic startup in New Delhi, India. It is the leader of how small and medium organizations manage their HR and I was excited to be a part of its journey. My Internship was in the Business Development and Sales department of the company where I had the opportunity to hone my skills in identifying new business opportunities and displaying the value proposition of Talent Carriage’s HRSS model to as many organizations in India as I could.

My Missions

As a BD intern, I was on the hunt for new markets and organizations to spread the word about talent carriage and the benefit of HRSS. My job was to conduct market research and competitive analysis which helped me build a 20% bigger database of potential client databse. In order to complete this process, I had to research market trends, pinpoint businesses in need of HR process optimization, and assess the competitive environment. Following this, I also carried out surveys to learn more about the HR requirements of various Indian companies. I was able to create buyer personas and comprehensive profiles of our prospective customers thanks to the survey. Together with the sales team, these personas assisted me in developing BD strategy and practical insights. In addition, we were able to customize our strategy for various clientele groups, which improved the focus and efficacy of our sales pitches.

Required Skills and Knowledge

In order to succeed in this challenging role. I needed several skills including Research and analytical abilities which were very important in understanding and analyzing market trends. After this, I also improved my communication skills in this role both written and verbal. While conducting surveys and sending cold emails and sales pitches I honed my skill of communication by effectively communicating the benefits of Talent Carriage’s service. Building rapport and effectively presenting our solutions were key aspects of the role, requiring strong interpersonal and presentation skills.

What I Learned at Talent Carriage

This amazing summer internship helped me learn and hone various skills and pushed me beyond my comfort Zone. To begin with I gained a deep understanding of HR and how transformative HR-shared services can be for all organisations. The fast-paced and challenging environment also helped me hone my research and analytical capabilities. The most important skill I learned was clear and concise communication. This skill was crucial to creating good sales pitches and cold emails. Identifying the needs of organizations and tailor-making a sales pitch and presenting it compellingly.

Financial concepts related to my internship

Customer Acquisition Cost (CAC)

I found that knowing CAC was essential to the Business Development position at Talent Carriage. The average cost of gaining a new client is referred to as CAC. For BD teams to evaluate the effectiveness of their sales activities, this statistic is crucial. Talent Carriage calculates the cost per lead generated and, eventually, the cost of obtaining a new client who signs up for their HRSS services by examining our research and outreach efforts. An effective sales approach is shown by a low CAC in comparison to the revenue a client generates. Our understanding of CAC, helped us adjust our outreach strategies to focus on the most economical market groups and improve the overall sales strategy.

Return on Investment (ROI)

While CAC focuses on the cost of acquiring a client, ROI analyzes the return on investment generated by a client. ROI would be determined by comparing the revenue from Talent Carriage’s HRSS services against the costs associated with acquiring and retaining those clients. We were able to evaluate the effectiveness of Talent Carriage’s business model and identify areas that required improvement thanks to our understanding of ROI. When sales presentations emphasize the financial benefits for potential customers and demonstrate the favorable return on investment (ROI) that the HRSS model produces for clients, they become more appealing.

What I learned during my internship

The three main things I learnt during my internship at Talent Carriage are as follows: I gained information about the structure and working environment at Talent Carriage. I learnt about digital transformation, particularly HRSS Proccess. I acquired an insight about the soft and hard skills required to work as an Business development Intern.

Related posts on the SimTrade blog

   ▶ All posts about Professional experiences

   ▶ Alexandre VERLET Classic brain teasers from real-life interviews

   ▶ Jérémy PAULEN My Marketing Developer Experience

Useful resources

Talent Carriage

Bhavna Deuglo What is HRSS and How Can It Benefit Your Business?

About the author

The article was written in November 2024 by Vardaan CHAWLA (ESSEC Business School, Master in Strategy and Management of International Business (SMIB), 2020-2023).