Four Simple Ways to Minimize Risks in the Forex Market – Introduction
The financial market is a risky industry to be involved in. In it, many people have seen their lives’ wealth disappear in thin air. There are many examples for this. For example, Bernie Madoff lost more than $65 billion in his pyramid scheme which he started with good intentions. Bill Ackman recently lost more than $5 billion when his bet on Valeant Pharmaceuticals and his short on Herbalife went south. Last year, Andy Hall, commonly known as oil ‘god’ shut down his fund after weak performance. He was followed closely by Anthony Ward who was among the best known cocoa trader. Therefore, how do you minimize your risks and avoid being in this situation?
This refers to the size of trades that you open. In the contemporary market, if a stock is trading at $10 and you have $10000. If you decide to spend all your money on the stock, you will have 1000 shares. If it goes to zero, you will lose your entire $10,000. If on the other hand you decide to invest just $1000 on the stock and it goes south, you will lose $1000. Similarly, in the financial market, when you open a large size, it exposes you to more risks. If it goes well, you will make more money. Therefore, it is recommended that you open small trades.
Leverage refers to the ability of borrowing money to invest in something. It is known as using other peoples’ money. Most brokers offer leverage to their customers. This leverage exposes them to more profits if the trades go well. If on the other hand the trades go south, you are exposed to more losses. A common problem among many new traders is to use the biggest amount of leverage offered. To reduce the risks, you should go for a tiny amount of leverage. Doing this will help you reduce the chances of risks.
Another problem many traders do is that of starting to trade without taking the time to learn and be educated about it. This is a challenge because many of them assume that they can buy and sell without making mistakes. To prevent this situation, it is recommended that you first take time to learn more about forex and the financial market. Doing this will help you understand how the forex market works and how to avoid the popular mistakes. At Day Trade the World, our team of experts is always ready to provide this education to you.
A stop loss is an important tool that allows you to stop a trade automatically when a certain pre-defined level is reached. This level is usually determined by the trader according to his risk appetite. If you want to keep trading for a long time, it is a mistake not to use a stop loss. This is because the security you are trading can move sharply in either direction. If it does, and when you have a good stop loss, it will minimize the impact. Better still, you can use the trailing stop loss. This is a stop loss that moves with the chart and locks in the profit.