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Risk, in trading, is a highly misunderstood concept, and it is often used as an excuse not to get into trading. However, like all things related to investments, risk is inevitable. In the same way that the property you bought last year might not deliver a high ROI for a while, the same goes for trading. Risk may not be completely avoidable, but it can be controlled. By sticking to a trading strategy, having a mentor, and having a realistic view of your finances, you can avoid placing your money in the wrong place and even turn trading into a side hustle.
When you are just starting out, it is actually a good idea to focus on low-risk strategies and avoid bold moves. Trading can be quite a lucrative venture but, before you become a success story, you must be patient, invest in your education, and take it slow. Here is how:
Rule #1: Trading Will Always be Risky If You Do Not Invest in Education
Many of the stories about trading being high-risk and a waste of money do not actually come from professional traders. They come from beginners who heard that trading is profitable and easy to do, had unreasonably high expectations, and lost all their money because they did not know how to trade.
In recent years, trading has become incredibly accessible. You can be a 21-year-old college student with nothing more than a smartphone and $500, and you can still start trading. The barriers to entry are virtually non-existing, and that is one of the awesome things about trading. However, just because Forex or binary options are easy to get into does not mean they are also easy to master. On the contrary.
Trading is a matter of trial and error, of careful risk calculation and market analysis. No one said it is impossible to make money as a beginner and turn $100 into $1000 just like that. But those cases are rare. Trading is not a get-rich-quick scheme, and it does not have magical shortcuts. The secret to success is to be diligent and to invest in your education; not necessarily invest money, because trading guides are available for free, but invest time to understand how the market works. The less you know about trading, the riskier it will be. When you do win, that is a stroke of luck, and it will eventually run out. To reduce risk, learn as much theory as possible because it will come in helpful, and follow professional investors on social media. Subscribe to finance blogs and magazines, listen to podcasts, and take the time to discover what strategy would work for you.
Create a Demo Account First.
The transition from theory to practice can be pretty bumpy, even for someone who spent a long time reading about things like fundamental versus technical analysis. To limit losses in the beginning and avoid disappointment, you can start applying what you learned by creating a demo trading account.
A demo account looks and works in the same way as a real trading account, except that you do not deposit any funds. You will not win anything, but you will not lose anything either. This is a great way of practicing, putting your strategy to the test, confirming your theories, and getting used to the platform, really. You do not risk anything by using a demo account. Instead, you can enjoy these benefits:
However, there is also a word of caution for demo accounts: because you know you can't lose any money, you might make bolder moves than you would in normal circumstances. Ideally, you should only use a demo account for a few months, until you get the hang of it. Then, when you are ready, start with small amounts and do not attempt any bold moves - at least for a while. As a beginner, it is also important to avoid acting on trends, hype, and information from questionable sources. Stick to what you know, and even if progress will be slower, at least you do not risk high losses.
Not all trading strategies have the same level of risk. In the beginning, it is advisable to stick to low-risk, low-reward ones. For example, when you start trading binary options, you can try the covered call strategy, the bear put spread, or the protective collar strategy, all of which minimize risks. Many traders feel pressure to go one step up at one point and start using high-risk, high reward strategies, but you do not have to do that if you do not feel comfortable. Taking on high-risk strategies without being prepared and having alternative investments to mitigate your losses might ruin your experience. In trading, there is no such thing as a one-size-fits-all secret recipe. It all depends on knowing yourself and choosing a trading strategy you are comfortable with.
Discipline is one of the most important qualities of a successful trader. You need discipline to stick to a well-informed trading strategy, to steer clear of media hype and advice from questionable sources, to manage your finances wisely, and to take on only as much risk as you can afford. In trading, losses are inevitable, but you must plan your strategy in such a way as to afford those losses. A disciplined trader will never invest the money needed for essential expenses, nor will they let emotions dictate their moves. A disciplined trader will pay attention to the process, not only on the outcome of the trade. Do not forget that the market rewards disciplined traders, who stick to their tried and tested strategies and do not take unnecessary risks because of what they read in a clickbait article.
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