Do you love online trading but hate risk? If so, there are several effective hacks for keeping the chance of loss to a bare minimum. Remember that while nothing is guaranteed, and everyone is on the losing end from time to time, there are reliable ways to minimize both risk and the subsequent losses that can result. On a positive note, traders can employ as many or as few of the following techniques as they want. It all depends on the instruments and assets you like to trade, how often you enter positions, and the amount of riskiness you’re comfortable with. Here are the methods and be sure to test each one out in a demo account before employing them in real money transactions. While the majority are forex-specific, nearly all the tactics can be applied to trading of any asset class, including stocks, futures, CFDs, etc.
Read also this FintechZoom article: How to Trading Online? The Complete Guide.
Choose a Regulated Broker
Above all else, find a broker that is regulated by the authorities in the jurisdiction in which it operates. If you choose an online forex broker in Canada, make sure to work with one that is licensed to offer all the services on its menu and is regulated under national financial authorities. The same is true no matter which nation your brokerage firm is headquartered in.
Avoid Fixed Stop Amounts
Whether trading foreign exchange currencies, stocks, commodities, or any other asset, avoid the temptation to set stops of fixed values. While it’s easy to do, the principle behind setting fixed stops is erroneous because every transaction is unique. When buying shares of a blue-chip stock whose price rarely moves, it might make sense to set a very small stop. On the other hand, when buying a forex pair that is extremely volatile, larger stops could make more sense. Always evaluate the particular situation, financial environment, and specific position you’re taking before setting a stop loss point.
Read Listed Trading Brokers And Should You Buy Their Stocks?.
Pay Attention to FX Spreads
Don’t ignore spreads on forex. Many brokers offer no commission trading and earn their cut on the bid ask spread paid by account holders. Keep track of spreads you pay in order to know the total cost of trading. Lots of small fees can add up over the course of a month or year.
Employ Smart Position Stops
Know your risk level on each trade and set stops so that there’s no chance of losing more than a set percentage of the account value. Many FX traders use a 1% rule and thus never risk more than that percentage of their available balance. Calculate worst-case scenarios in which every stop is hit. Consider never placing a stop loss point so far away from the entry that a loss would be larger than 1%, or whatever percentage you determine is appropriate for your own risk tolerance level.
Practice, Practice, Practice
For both newcomers and experienced trading enthusiasts, practice is the key to long-term financial viability. The good news is that all the top brokerage companies offer demo accounts so their customers can practice without risking real money. Those who want to minimize the riskiness of their positions should spend time in a demo platform honing their skills. Two of the most critical lessons a person can learn in a demonstration environment are order placement and order exiting. Every platform has its own quirks, features, and challenges. Become fully acquainted with your brokerage platform by making dozens of demo transactions of varying sizes and types. Spend enough time so that placing orders becomes second nature and you understand the differences between the various features within the platform.
Say Goodbye to Daily Targets
New account holders often set daily profit targets based on fixed amounts of money or a percentage of their account balance. While it’s always wise to have goals and a trading plan, avoid setting daily or weekly targets. Markets are so volatile that there’s a high probability of enduring multiple days, weeks, or months of hit and miss results. This is particularly true for daily profit goals.
Learn Hedging and Watch Leverage
Consider opening multiple accounts that offset one another in cases where risk is unusually high. Hedging should not end in a net zero result, but it should deliver a lower overall amount of risk on a given position. Likewise, try to keep leverage as low as possible, especially on FX accounts. New traders should avoid high leverage until they are comfortable using it. Keeping total risk as low as possible is the goal. Both hedging and leverage can serve as tools for preserving capital.
