In recent years, the world’s fascination with trading has grown exponentially. Whether be it- Forex, Stocks, Commodities or Cryptocurrencies; trading markets have drawn the interest and attention of everyone .alike. Some treat trading as short term activity while others view it as a long term investment, whatever the mindset is- trading is now certainly a part of everyone’s life including the average joes as it is an amazing alternate steam of income in these tough times. As you start trading, it is inevitable to bear loss; gains and losses are sides of same coin, but there are some ways through which you can minimize or reduce the risks in trading.
We have listed a few here to help you out: Reduce Risk in Trading
- Put Surplus to action- As more and more people start trading, amateur mistakes are bound to happen. One of the biggest mistakes that beginners make is risking their essential assets to get started in the market. The most important rule in trading of any kind is that you risk money or assets you can afford losing, i.e., only trade with surplus money, so losses in trades won’t affect your daily life.
- Calculate risk per trade- All trades can fail and create losses, thus, they are equal in this way. As a beginner, trading inconsistency is normal. When a novice enters in the world of trading, they see each trade as a singular entity but forget to see the large picture. Not only does one needs to calculate risks per trade but also see it as a part of their long term trading plan and where every trade & their risks fit. Figure out your trading capital to properly estimate your risk capacity. It is suggested to invest only 2% of your whole trading capital when you are a beginner.
- Risk/Reward Ratio – Risk/ Reward Ratio or RRR – as it is commonly known, is what defines your trades and profits. The RRR should be decided after a thorough consideration of your trading capital, risk capacity and your goals. When RRR is set properly, it increases the chances of executing better trades to gain better profits. With proper RRR, setting limit orders (stop-loss and take-profit) is easier which helps in protecting your funds and assets.
- Determine your risk tolerance- Risk Tolerance is one of the most important factors when it comes to being a successful trader yet a large number of beginners ignore it, which causes huge losses and discourage people from trading. Risk Tolerance depends upon certain factors like your age, the level of your knowledge about the market, your asset- losing capacity, your experience and your long term goals etc. The knowledge of risk tolerance that you possess increases your control over the whole trading situation.
- Consistency- Many beginners tend to expand their positions after only a few successful trades but this can have negative effects. Unless your trading capital has grown exponentially, one must continue with a consistent risk strategy. It’s important that you stick with a risk-management plan for a considerable time to see profits, as unnecessarily changing these plans can cause huge losses as it compromises their long-term trading plan.