Many people think trading in the financial markets is a lot like gambling, and there’s a lot that’s misleading in this way of looking at things. While it’s true that trading involves the taking of risks in the hope of reward, there is a lot of analysis and forethought that goes into making a financial trade. It requires great dedication and discipline to become truly successful as a trader, as every trader worth their salt will tell you for free.
Let’s take a bit of a look at just what it takes to manage your money and earn success in the stock and forex markets. We’ll dive into such practices as using stop-loss orders, keeping a balanced portfolio, using leverage effectively, and so on. Some of these tips or factors might seem more relevant or effective than others, but they all play some role in the creation of sustainable, long-term wealth in a sometimes unpredictable environment. Alright then, let’s get into it.
Keep a Balanced Portfolio
We’ve all heard the old adage – don’t keep all your eggs in one basket, and we should all be aware that it is very relevant in the world of forex trading. When it comes to picking out the currencies or stocks to invest your hard-earned money in, it is wise to pick out a broad selection of unrelated holdings.
The reasoning behind such a course of action is that in the case of a particular holding or market segment suffer from a sudden and catastrophic erosion of value, you may at least see the losses you incur narrowed down to that specific area of your investments, rather than potentially wiping out all your investment capital. That’s the power of a balanced portfolio.
Figure Out Your Risk-Per-Trade Level
The name of this technique pretty much explains what it’s all about. Your personal risk-per-trade level refers to just how much you are willing and able to risk on a single transaction without putting your financial security in jeopardy. It is a vital element of wise financial management, even if it may seem like an overly-cautious measure to some.
You won’t be able to squander the entire contents of your capital reserves on a stretch of losing trades. The most commonly stated risk-per-trade limit suggested to traders is 2% of their total trading account, but it’s generally understood that absolute beginners should set this limit even lower for their own safety.
Make Wise Use of Leverage
The fact that forex brokers have made it a habit to offer traders extremely generous levels of access to leverage has made the market highly attractive to them. While leverage might be considered a necessity in a market environment where currency pairings will see average movement of less than a percentage in a day, traders must be alive to the fact that the more leverage is employed in their trades, then the more their potential losses should the trade go sour. A way to mitigate the loss magnitudes is to always analyze your trades in pips and set your stop-loss order accordingly.
Don’t Let Emotions Direct Your Actions
You can’t afford to be the sentimental type in the forex trading world – it just won’t work out for you in the long run. Beginners in particular will have quite a bit of trouble when it comes to knowing when the right time to cut their losses and dump a losing holding is. They will often prefer to hold on as they lose more and more money in the hopes that the downswing will be temporary – often to their disappointment.
Set your entry and exit levels using the most appropriate analysis tools at your disposal and allow the market to be the judge of just when you need to make your move. You will need to call on all your discipline and rationality in the end – that’s just good business, after all.
Keep Learning Even as you Trade
As you grow your base of market knowledge and analytical skills with every successful or not-so-successful trade you go through, be sure to always learn from each experience. Keep a journal so that you can set the lessons of your days down for future reference. That’s the best way to identify any weaknesses and bad habits in your trading, as well as spotting where you have good instincts and sound judgment. These all go towards making you a successful trader.