As the saying goes ‘trading is risky’, and it’s true, each trade carries the possibility of a loss or a gain. The question every trader should be asking is not ‘is trading risky?’, but instead, how to minimise the risk in order to maximise profits.
The key to smart trading is effectively managing your risk in order to make better trading decisions. The best place to start is with a risk management plan.
Let’s explore three key risk management techniques traders can use when managing their investment risk and building an effective trading strategy.
Technique 1: Educate yourself
The first step any trader should take when developing their risk mitigation strategies is self-education.
Start by learning the basics. In order to begin trading effectively, you need to be aware of what you’re trading. Do you want to own an asset, or a stock? If yes, then you should consider traditional trading. But, if you only want to make a profit on an asset, then CFDs (contracts for difference) may be for you. Do your research and find the best trading style to meet your needs.
Next get to grips with the terminology – what do the terms , and really mean? This will help you better navigate the tricky world of trading.
Now you’re ready to discover the markets. Do your research. Interested in cryptocurrencies? Then do your best to learn all you can about the market, from ICOs (initial coin offerings), to white papers, or the latest value of bitcoin. This is all important info for deciding what to trade, and when.
Maybe cryptos aren’t your thing. The same applies to every other market. Whether it’s fiat currencies, commodities, indices, or stocks, keep ahead with the latest market news, earnings reports, political news, and charts. They will all help you become an informed trader.
Finally, get to know trading biases, and more importantly how to avoid them. Biases are unfortunately little tendencies in human behaviour that can impact the success of a trade.
Take the for example. If a trader believes him or herself to be on a ‘winning streak’ they are more likely to be careless with their trade. This can be either through placing a poor trade or increasing the volume of their trade unnecessarily. They believe they will win the next one, and this puts them at a higher risk of losing, as they haven’t traded based on facts or logic.
By learning about biases and being aware of them, a trader lowers his or her risk of making an unprofitable trading decision.
Technique 2: Stop-losses and take-profits
Now, you’re ready to hit the markets? Well, not quite. Before you start trading, there are two very important things you need to know – stop-losses and take-profits, the second of our risk management techniques.