New to trading? Most gamblers would say, it’s not about “what you can win” but rather “what you can afford to lose.” Trading, like other ventures, involves the probability of losing money. But on the bright side, trading involves making more money if you know how the market works and how to manage possible uncertainties.
We get it – risks are inevitable. However, trading while keeping your risks low is possible. It keeps you in the game while putting money in your pockets. As a trader, it’s important to know how you can limit these risks and manage them when they arise. To begin with, here are five ways to minimize trading risks.
- Invest in the best equipment
A trader doesn’t succeed on knowledge alone. If you’re serious about gaining success in trading, then it’s a must to invest in high-quality equipment. You need a fast computer, a speedy and stable internet connection, and advanced analysis tools and trading platforms.
- Set a stop-loss order wisely
Every trader seeks to minimize his loss on each trade to preserve his trading capital. That being the case, it’s a must to utilize a stop-loss order which, as its name implies, is meant to stop you from losing any further money. It refers to an order placed with a broker to sell a security when it reaches a particular price. It is designed to your reduce loss on a position in a security when the trades don’t go the way you expect.
We can say that stop loss serves as a parachute to cut your losses. That said, your stop loss has to be balanced – Neither setting the stop loss too tight nor too lose can help you make profits easily. The only way to determine the best stop levels for your trading plan is through technical analysis, which involves testing and optimization. Most traders set their stops at a price where they might be possibly wrong.
- Stick to a reasonable position size
Trading is gambling. While betting in big lots allows you to gain much more money, it also allows you to lose as much relatively. The premise is to never trade money you can’t afford to lose.
Maintain an appropriate position size. If you’re uncertain, always start small. It works when you have a new trading plan in the market wherein you don’t increase your position size without giving it time to prove itself under a variety of conditions.
- Utilize margin and leverage with discretion
Don’t count the chicks long before the hen is able to lay the eggs. If you don’t know what that means, it simply says to take into consideration your potential losses instead of merely eyeing on your potential gains.
Margin and leverage should be used prudently. Margin refers to a loan granted by your broker which allows you to leverage the securities in your account to enter larger trades. You use margin to create leverage, which refers to the increased buying power available to margin account holders. With leverage, you can pay less than full price for a trade and have the ability to enter larger positions.
While using leverage and trading on margin can boost your returns, it should always be used carefully for it’s possible to lose more than you originally invested.
- Look at trading as a business
Like any kind of business, you should have a smart strategic plan so you won’t walk out empty-handed.
Your trading plan should specify what you will trade, how you will trade it, how much can you expect to make on each trade, and when to enter and exit a trade. Everything should be thoroughly researched, tested on historical data and in a live market, and evaluated at regular intervals before executing the plan. It’s also crucial to choose the right trading style which would best suit your time, expertise, and risk tolerance.
Author Bio: Sophie Harris is one of the resident writers for FP Markets CFD Trading, a CFD and Forex Trading provider in Australia with over 12 years industry experience serving global clients. Writing informative content about business and finance is her cup of tea.