We all know it is there, but we just don’t want to think about it – The risk in investing.
I know it is scary and this is why I have decided to talk about it. A lot of people say that investors should stay calm in the face of risk. But how do you manage to keep your emotions under control, when you know that you could lose a lot of money?
I will give you a few very important principles which can help you control the risk. Applying them in your day-to-day trading could help you eliminate the risk and maximize your profit potential.
As a beginner, you would not want to risk putting too much at first, because there is always an equal chance of failure as success. You will have to focus on minimizing this risk by following strategies like:
● Stop Loss and Take Profit — These orders are the bread and butter of careful traders, as they can both protect from loss and lock-in profit. A Stop Loss order closes a trade once a specified amount for loss is reached.
Take Profit does the same when a certain profit point is reached. Since many traders depend on technical analysis when trading, they often have a range in mind within which they believe a certain asset will move.
Therefore, they can place Stop Loss and Take Profit orders at either end of this range to control the risk involved. This way, they will know both their maximum loss and their potential maximum gain.
- Diversification — Diversification is always important when dealing with financial markets. Traders will sometimes open and close trades within hours, or even minutes. However, if their strategy is somewhat longer term they can definitely use diversification to spread out their risk.
Check out the video now to learn even more helpful strategies of risk management:
- Hedging — Many traders focus on one asset class, such as currencies. When it comes to the currency market, traders are often protected by opening positions on gold or other precious metals, as they often have an inverse relationship with fiat currencies.
- The 2% Rule — Normally traders look for big price changes to take advantage of and often use leverage. This may tempt them to put a large chunk of their funds into a potential trade, which also puts them at risk of losing a lot of money.
Therefore, some traders faithfully follow self-imposed rules. A prominent example is “The 2% Rule,” according to which a trader will never allocate more than 2% of their equity for a single trade.
And finally, you can limit the risk by making reasonable and knowledge-based decisions. What that means is to simply study the markets carefully before making an investment.