As an investor in any field, one of the most important questions that should be flashing in your mind every minute is how to reduce risks. Thus, investing in online trading will require you to follow the necessary measures to reduce risks in trading stocks. If it were easy and possible to accurately predict market volatility and eliminate all risks in trading, online traders would be enormously successful. Typically, the stock market itself is defined and characterized following its volatility. Besides, prices are always moving up or down. Even though it might be impossible to eliminate risks, your all-time objective should be to maximize gains and minimize risks as much as possible. Fortunately, following the tips below can help you reduce risks in online trading.
- Apply Diversification Rule
Primarily, portfolio diversification is designed to manage volatility and risk. This strategy involves owning investments in different asset classes. Thus, your exposure to any type of asset is limited. This also reduces your overall risk profile. A diversified portfolio can include global stocks, ETFs, mutual funds, bonds, or stocks from different industries. What is the importance of portfolio diversification?
Portfolio diversification all stems from the thinking of not placing all your investment eggs in one basket. This is because while some stocks are rising, others will be falling. Usually, the returns from a diversified portfolio tend to be slightly lower than the returns an investor might earn if they concentrate on a potential single winning stock. Nevertheless, if the price of a certain stock falls unexpectedly, you will incur a substantial loss. We can conclude that portfolio diversification involves the golden rule of investing.
- Avoid Over-Confidence and be Consistent
Some traders, especially newbies tend to think that because their first few trades were wins; they will always win. Hence, they will become overconfident and increase the size of their positions. This is quite risky as it could lead to huge losses following a sudden change in market conditions. It is best to avoid making assumptions while keeping your risk continuously in line with your overall plan.
- Consider the 2% Rule
Basically, the 2% rule involves an investment strategy where you can only risk not more than 2% of your available capital on a single trade. This rule guarantees that your portfolio is not severely damaged if the market goes against the trades. This 2% is considered a permissible risk level.
- Set Realistic Goals
Setting realistic goals for a return on the initial investment is crucial. Be warned that setting a profit goal that is too high could result in excessive risk-taking. This, in turn, could result in heavy losses.
- Stay Well Informed
It is crucial to understand the variables that lead to market volatility. Factors like quarterly earnings reports, trade wars, interest rate decisions, and economic reports will significantly affect the market. Also, other economic events could lead to massive shifts in the markets.
Ensure you have a basic understanding of such factors to know the best investment time. For instance, you can achieve this through free online trading courses.
- Avoid Emotional Investing
Online trading requires avoiding emotions and feelings from interfering with their business. Impatience, panic, overreaction, or fear should not determine how you trade. Also, do not be excessively attached to a specific stock.
- Set a Clear Plan
You should know when to enter or exit the market as an online trader. Also, clearly plan the maximum amount you are willing to lose for a specific trade. Remember to stay watchful for fresh opportunities in the market.