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Tips on How to Avoid Losing Money While Online Trading

Trading may appear to be a quick way to make money, but many traders lose a lot of money. OptionTips spoke with a trading expert such as Forex Online Brokers to learn what strategies you can use to reduce your risk.

“Many newcomers to trading begin to invest wildly without having thought up a strategy beforehand,” explains Roland Ullrich, who wrote the book “Trading Psychology for Dummies”. “It’s like a non-swimmer trying to learn to swim in deep water.” The economist and financial analyst explained to t-online what you can do better than the average when it comes to trading.

Keep your losses to a minimum

More than 40 years ago, Nobel Laureates Daniel Kahnemann and Amos Tversky discovered that people have a tendency to lose more weight than they gain. That is to say, in uncertain situations, such as on the stock exchange, they are more likely to realize profits than losses. As a result, a falling stock will not be sold in time.

“This is why most traders lose money in the long run,” Roland Ullrich emphasizes. The expert gives an example calculation: Anyone who loses 10% of their capital while trading must now deliver a positive performance of 11 percent to return to their original status.

However, if you lose 50% of your capital, you must make up the difference with a 100% positive return. “It’s a difficult task. The majority of traders do not recover from such a large loss “Ullrich explains.

As a result, his recommendation is: “Set a loss stop, or the price at which you will sell again, ahead of time. Accepting losses and thus a mistake is difficult, but it is a necessary part of the process.” Buying more in the event of losses is also a common and fatal mistake.

Don’t cash in on your gains too soon

When the price of a purchased share rises, investors weigh gains less heavily than losses, and as a result, they are more risk averse on the stock market.

“We want to eat as soon as possible. That is, we want to profit as soon as possible “Ullrich explains. This is frequently the wrong approach. “The price is rising, indicating that we made a good investment decision. Because there’s a good chance it’ll go up, it’s not worth it to cash in on the profit right away.”

Quick profit-taking is especially dangerous when combined with the fact that traders rarely limit their losses. This would mean that a string of losses would no longer be offset by a string of victories.

“If you still don’t want to take any risks,” Ullrich says, “you can adjust or increase your stop-loss if the price rises.” If you bought at 80 euros and the rate rises to 100 euros, you can raise your limit from 70 euros to 80 euros and avoid losses.

Establish a strategy before you buy

“As soon as you buy a stock or another financial instrument, you as a trader become self-conscious and emotional,” Ullrich says. As a result, profits are taken too soon, and losses are realized too late. “That’s why, before the trade, you should do all of the preliminary work yourself – and then sit back.”

As a result, it’s critical to be specific: which course do I want to enroll in, and when do I want to sell again? What is the most significant loss I would be willing to accept?

  • A stop-loss order allows a trader to set a price that is lower than the current price. From this point forward, a sell order for the security is automatically triggered. Stop-loss orders are placed in the same way that regular securities orders are.
  • The opposite is true forĀ take profit orders. You instruct the broker to close an open position or a trade at a specified maximum price.

“You should know the price at which you want to sell in the event of a profit or loss before each trade, as well as how long you want to hold the position. You should also decide on the size of your position, or the amount you want to invest, ahead of time “Ullrich, an expert, agrees.

“You basically don’t have to invest any more time in your trade if you use a take-profit order in combination with a stop-loss order because you’ve already made all the decisions.”

Don’t put all of your eggs in one basket

“The general rule is that you should never risk more than 2% of your total capital in a trade,” Ullrich says. This rule, however, only applies to deposits of more than 10,000 euros. “With a smaller depot, getting the fees back at 2% is difficult.”

Traders with small portfolio volumes, however, should keep their positions as small as possible. Because: It’s more difficult to recover from a series of losses when your positions are larger.

Trade CFDs with caution

CFDs (Contracts for Difference) are extremely popular among day traders. These are difference contracts, which are special securities that allow you to speculate on the future price of stocks or changes in the value of currencies or raw materials.

The trader, for example, purchases a virtual share from a CFD trading provider and deposits a security deposit. When the CFD’s term expires, the investor returns the stock to the provider. The investor will make a profit if the share price rises during the term, and a loss if the price falls.

However, more than three quarters of investors lose money when trading CFDs, according to the financial regulator Bafin. “I may make myself unpopular in the scene, but I would advise beginners to use CFDs with extreme caution,” says trading expert Ullrich. If you want to trade CFDs, follow Ullrichs’ advice: “Select small position sizes and low leverage, devise a clear strategy, and adhere to your set of rules.”

Gradually improve your skill level and use demo accounts

Financial products with so-called levers, such as derivatives, can multiply profits, but they can also work in the opposite direction. That is to say, you have the potential to greatly increase your losses. Beginners may quickly become overwhelmed by levers, according to Ullrich. “Trading is a craft that must be learned,” says the financial psychology expert.

As a result, you should begin trading without leverage and gradually increase your leverage as your knowledge and experience grow. “Many online brokers also provide demo accounts where you can practice with different strategies and instruments. It’s worthwhile to spend a few weeks or even months practicing trading there.”

Be careful with trading groups

Trading groups on social media are being warned aboutr. “Alarm bells should ring when trading groups on Whatsapp or YouTube promise quick wealth for little money. That kind of thing is always suspect “When asked by OptionTips, Joe Miller, head of the consumer advice center’s pension, banking, and credit department, said.

Social trading, on the other hand, is a different story. You can copy other members of a social network’s investment strategies, or portfolios, here.

This is how it works with social trading: To begin, you must first register with the platform, choose a trading strategy, and give your permission for your personal trading decisions to be copied and executed. The social trading platform sends the trader’s trading decision as your order to a cooperating partner, such as a bank, who executes it.

Many people consider social trading to be a less expensive alternative to professional asset management. However, you should exercise extreme caution when selecting a trader to implement your trading strategy. Read the India Forex brokers guide about more on this topic.

Alternatively, simply looking at the public depots on the platform – and allowing yourself to be inspired – can be worthwhile.