Top Risks Associated with Trading and How to Avoid Them – Introduction
Trading is a risky business. In the past, many traders have lost a good portion of their money. In fact, 95% of all people who try their hand in trading lose money. Therefore, trading is not for the faint-hearted. It is a risky business that has led many people to their death. In this article, I highlight a few risks associated with trading and how to avoid them.
- Psychological risks
Trading is a zero-sum game. This means that for you to make money, someone or an institution must lose it. No one likes losing. Therefore, there are risks that go hand in hand with losing money. Some people get so affected after losing that they become psychological wrecks. As a trader, you need to do a few things to protect yourself from having psychological problems after losing. First, you must understand that trading is a win and lose game. You will not have successful streaks all your life. Second, you must be psychologically prepared to lose money any time you open a trade.
- Risks of losing it all
There is also the risk of losing all your money in trading. I have seen people who have lost a good amount of money through trading. I have also seen people lose all their money within a matter of hours. This is a risk that can be prevented. First, you should consider the risks that you take when opening a trade. Ideally, you should always open a trade with a very small lot size. A big lot size means that you will lose more money if your trade fails to work out. Second, you should consider having a stop loss that limits the amount of money you lose if your thesis fails to work out.
Trading can be an addictive thing to do especially if you are a successful trader. Just like gambling, this can be a serious problem if it is not controlled. I usually advice people wishing to become traders to do the best that they can to trade for a short period of time every day. In most cases, most people who are addicted to trading find themselves losing money in the long term. This is because they overtrade. Remember that too much of everything is poisonous.
- Overnight trades
This is a risk common among swing traders. This is a situation where a trader opens a trade and waits for a few days before closing it. The issue here is that anything unexpected can happen at night when markets are closed in their region. For instance, when USA launched missiles in Syria, it happened when US markets were closed. Markets fell soon after that. Therefore, if you had an open overnight trade, chances of losing the money were high. To remove this risk, you should consider having a stop loss to prevent huge losses from happening.
- Risk of Market data
At times, we use different indicators to help us predict the market. A good example is what happened last week when major banks released their earnings. Before Goldman Sachs released its earnings, the previous banks had released excellent results. Therefore, most people expected Goldman’s results to be great. When Goldman released, the results were not very good which made the markets to fall.