Trading in financial markets can be incredibly rewarding but is also fraught with risk.
Whether you’re dealing with stocks, forex currencies, commodities, metals, indices, futures, or even cryptocurrencies, understanding these risks is vital. Managing these risks effectively is equally important.
Let’s explore the key risks inherent in trading and how they can be minised.
Psychological risk, managing feelings and emotions
Historically, probably one of the most underrated risks in trading but gaining significant popularity today. Psychological risk refers to the impact that feelings can have on trading outcomes. It involves managing emotions and maintaining strict discipline to reduce adverse financial decision making.
There are several ways that a trader can manage psychological risks
- The first step is to develop an investing plan to help you stay focused. The plan should outline your goals. It should include your strategy for executing trades. The plan must define the level of risk (loss) you’re willing to incur. It should also specify your budget.
- Second is to deploy risk management tools to limit losses and lock in profits. This includes setting up stop-loss orders. These are triggered when certain price levels are reached. At that point, the trade is exited to avoid further losses. It also includes take-profit orders. These specify the precise price at which to close an open position to lock in profit.
- The third step is to properly understand the risks involved in using leverage. You must ensure that you manage leverage properly. This is important to avoid over-leveraging. Over-leveraging can potentially amplify losses exponentially.
- A fourth step is to journal your trades, including your behaviour when opening and closing positions. This offers historical data you can look back on. You can use it to assess and adjust future behaviors. This helps increase your chances for trading success.
Ongoing learning
Another impactful way to mitigate trading risk is engaging in ongoing learning. This is especially important for the psychological aspect of trading. Financial markets are in a constant state of flux. Things are changing all the time. Staying informed helps manage the emotions and angst of volatile investment conditions.
By increasing your knowledge of key trading concepts, strategies, and risk management, your confidence will likely increase.
This helps mitigate feelings like fear, lack of confidence, and arrogance. There are many ways for an investor to acquire this information, especially online and also through brokers.
For example, T4Trade has an Academy for its traders. They can access podcasts, webinars, ebooks, and videos-on-demand. There is even Live TV for daily Monday to Friday commentary.
In addition, T4Trade blogs address fundamental trading topics, for both beginner traders and more advanced. Another way to gain practical trading experience is through a demo trading account. The demo account allows a trader to execute trades using virtual funds. This ensures they don’t put their own money at risk of loss.
Additionally, investors can execute various strategies, regardless of complexity, to assess outcomes. They can make adjustments to their investment plan if necessary. A demo account is also useful for learning how to navigate the trading platform. It provides insights into real market conditions.
Finally, for beginner traders, a demo trading account offers the perfect opportunity to learn how to implement technical analysis, one of the core components driving decisions.
Additionally, if the trader registers for a demo account using the MetaTrader 4 platform, they can also discover more about algorithmic or automated trading, one of the most sought after MT4 features.
Market risk, monitoring economic and political news
Market risk refers to the possibility of an investor experiencing trading losses because of market-moving factors.
These include economic releases, political uncertainty, environmental disasters, unemployment rates, business sentiment, consumer confidence, interest rates, inflation rates, and many more. In addition, these factors have the ability to cause aggressive price movements, both up and down. If no risk measures are in place, the likelihood of losing your money increases dramatically.
Managing these sorts of trading risks involves any of the following options:
- Diversifying your trading portfolio. By spreading your investment (capital) across a range of asset classes, industries, and regions, you’ll minimise the impact of a downturn in any one single area. In other words, if one asset or industry performs poorly, the positive performance of other assets or industries in your portfolio can help offset the losses, thereby reducing the overall risk.
- Hedging. This risk management technique sees a trader taking an opposite position relative to a particular instrument to mitigate the risk of undesirable price movements. For e.g. a trader who holds a large position in a specific stock may purchase buy put options to protect against a possible decrease in the price of that stock.
- Tracking key releases. Monitoring global economic and political news and events is an important trader task, probably one of the most crucial in fact. One of the ways traders do this, aside from online news, television, etc, is to utilse an Economic Calender which informs traders when specific market moving events will occur. T4Trade offers such a calendar and it’s packed with incredibly useful features like access to real-time, updated macro-economic data; over 115 forex charts mapped to varied economic events for easy monitoring of currency pairs; and access to economic events for 38 countries mapped to target indices. Traders can also gain insights on historical trends and their impact on currencies plotting out the last 5 years of forecast and actual values for each economic event.
- Adjusting position size. This refers to the allocation of an optimal amount of capital to a particular trade in a way that aligns with your budget and risk tolerance. Proper position sizing can protect traders from significant losses, ensuring they remain vigilant of their budget, and not spend more than what they can afford on one deal.
Liquidity risk, major currencies and closing trades in time
Liquidity risk refers to when a trader is unable to exit a position quickly enough at a fair price. This may have an impact on your potential gains or lead to losses. Mitigating liquidity risk in this context requires an effective exit strategy, establishing the level of loss you’re willing to incur on a single position and closing trades promptly to avoid further loss.
Other ways are following a detailed trading plan to ensure trades are well thought out; trade with objective reasoning, not emotion; watch out for downside risk; and monitor prevailing trends.
Further, remember that stocks of large, well established companies and major currency pairs in forex trading are likely to offer better liquidity than small-cap stocks or exotic currency pairs.
Trading with a CFD broker like T4Trade
One of the most important elements of CFD trading is choosing a forex broker that best aligns with your budget, objectives and requirements. T4Trade is an award-winning global CFD broker with clients worldwide.
The broker is regulated, trustworthy and reputable, and has an expert team of researchers and analysts who offer expert insights on trading fundamentals. The forex broker offers flexible trading conditions, a diverse range of trading accounts to pick from, and an exceptional customer support team that is available 24/5 to assist you via Live Chat or email.
T4Trade also offers quick trade execution and swift and easy deposit or withdrawal of funds. Additionally, with its diverse range of assets, you’ll likely find your preferred market to trade in.
And finally, with T4Trade, you’ll gain access to the MetaTrader 4 (MT4) trading platform, probably the most popular online platform in the world that is suited to all types of traders, regardless of experience.
Disclaimer: This material is for general informational and educational purposes only and should not be considered investment advice or an investment recommendation. T4Trade is not responsible for any data provided by third parties referenced or hyperlinked in this communication.
