Howcantraders managerisk?

By Kate Leaman, Chief Market Analyst at AvaTrade

Risk is an inherent part of trading. It not only helps traders to optimise their profits, but also to manage investments and extend their gains. While the benefits of trading can be rewarding, judging the direction of the market takes some know-how,particularlywhenitcomestoshorter-termtrades as various factors can trigger unexpected movements. Learning about trading risks is critical in minimising losses whilst also enhancing the trading experience.

Beingawareofriskandrewardisvital.Itreferstothebalance a trader should have between the monetary value they are willing to risk in relation to the amount of reward which they desire. A risk reward ratio will stake a specific amount on a trade with a view to securing a certain amount of profit. The minimum risk reward ratio is 1:2 —for instance, if traders had an aim to secure £50, the most they should be prepared to lose is £25.

What Is Counterparty Risk

Investors face multiple risks when they are trading. This includes counterparty risk. The legitimacy of the broker you choose to trade with is vital in limiting trading risks. When buying CFDs, you are essentially buying a contract with a broker, which is why it is crucial you can trust that the broker will value the contract. In order to reduce risks, it is crucial to find a trustworthy broker.

How To Use Volatility In Trading

Volatility is a double-edged sword for traders, it can mean risk or gains. Ultimately, volatility increases the chance for gains or losses, no matter how small or big a trade is. Though there are certain indicators that signal looming market fluctuations, such as economic volatility, geopolitical tensions or changing policy, they are not to be solely relied uponastherearevariousfactorsthataidinthefluctuatingof markets, all of which can be hard to predict.

How Leverage Works

Additionally, when buying and trading CFDs, leverage is generally involved. This consists of a trader only staking a certainamountofthevalueoftheunderlyingassettheyplan to trade on, but receiving exposure to the whole value of the profit and loss which accompanies the asset’s fluctuating price. Essentially, leverage can grow the exposure you gain with your capital, which increases the likelihood for larger profits as well as bigger losses. Consequently, this high risk in conjunction with high reward needs careful management.

Working With A Solid Broker

There are various ways risks can be controlled to ensure a smooth trading experience. Whether traders are beginners or experts, becoming familiar with these risk management techniques is a step towards trading with confidence:

1. SELECT THE RIGHT BROKER

Choosing the right broker is a crucial component in manging counterparty risk. Brokers such as AvaTrade that are establishedandwell-regulated,arefactorstolookfor,aswell as the jurisdictions the broker is regulated in. Additionally, higher-quality trading partners tend to have more risk management tools and features available that will enable the better management of trades.

2. MANAGE YOUR CAPITAL-TO-TRADE RATIO

Maintaining a firm grasp on your capital-to-trade ratio is important when it comes to ensuring exposure to excessive lossesiskeptataminimum.Sensibleguidancetofollowhere isnottosurpassacapital-to-traderatioof5-10percentand to not risk over 2 per cent of your capital on one trade. This involveshedgingyourrisks,whichcanbedonethroughstoploss orders.

3. IMPLEMENTING TAKE PROFIT/STOP-LOSS ORDERS

An effective and common risk management tool is to implement ‘orders’ as well as trades. Orders are instructions that are carried out automatically when conditions are met. Two important orders are “take profit” and “stop loss”. Take profit orders involve closing the position as soon as it hits a specific point above the current market price. This is done to take profits off the table before market conditions potentially shift. On the other hand, stop loss orders automatically triggers selling the position at a predefined rate below the market price for a long position, or over the current market price for a short position. This stops losses from falling below a certain point and traders are therefore given a limit on how much they are comfortable with losing during a trade.

4. TAKE OUT PROTECTION ON RISKIER TRADES

There are some brokers who have risk protection tools that enabletraderstotailorandmaximisetheirtradingexperience. AvaTrade’s AvaProtect™ provides traders with a way to protect their investments. AvaProtect offers users protection against losses within a set timeframe. This protection tool enables investors to remain in the trade during occurrences of short-term drops in value, in addition to allowing them to benefit from the positive momentum of the position. Users will be able to benefit from movements in markets which are not as stable. This protection is vital in trades where market movements are highly unpredictable as this safeguarding against losses can be directed in favour of trading clients. Essentially, this is a significant tool that allows traders to go through losses yet still make profit.

5. EDUCATION

Furthermore, an effective way to manage risk is through education. Educating traders on risks is essential, with some brokers offering educative resources. For instance, AvaTrade’s AvaAcademy is a free global tool that provides userswithunlimitedaccesstoevolvededucativeinstruments on various topics in the form of pre-set articles, videos, and quizzes. AvaAcademy covers a wide range of topics such as stocks, EFTs, bonds, commodities, cryptocurrencies, and indices. Whether a user is a beginner or expert, AvaTrade’s AvaAcademy will allow them to trade with confidence by offering the necessary tools to educate themselves on risk.

Trading is a very rich and rewarding industry, with a degree of risk that must be taken into careful consideration. Being aware of these risks in trading and the ways to manage them can make all the difference in having an enjoyable, successful trading experience. With the aforementioned tips in mind, trading can become a much smoother and more successful experience for individuals.