Managing Risk in Trading – How to do it Right

The term risk management is well-known across the globe, although there’s no doubt that it’s particularly pertinent to the world’s financial markets.

Make no mistake; there are a number of key risks to the global financial system and those in developed economies such as the UK, including geopolitical conflicts and the threat posed by potential cyber attacks.

The term risk management refers to the process of taking active steps to minimise losses as an investor, rather than simply committing an amount of cash that you ‘can afford to lose’. In fact, investing in this way is tantamount to gambling, so you’ll need to recognise and manage individual risks if you’re to achieve sustainable results.

But how can you manage your risk effectively in the digital age? Here are some ideas to keep in mind.

Managing Risk as a Trader

Of course, managing risk is easier than ever in the digital age, thanks largely to the role played by online brokerage sites.

These comprehensive and largely automated platforms provide numerous ways through which investors can manage risk, from the deployment of analytical tools to practical measures such as stop-losses.

For example, investors who trade futures in UK markets can reduce their exposure to risk by applying more capital and less leverage to their positions. The returns can be slightly lower in this case but the loss margin is vastly reduced.

Still, it’s also important to recognise the main risks that need to be managed in markets such as stocks and forex. We’ve outlined these briefly below:

• Liquidity: We’ll start with liquidity, which refers to the ease with which instruments can be bought and sold and varies widely from one asset class to another. Major currency pairings such as EUR/USD (which accounts for more than 20% of all global daily trades) are incredibly liquid asset, for example, whereas certain cryptocurrencies and altcoins (aside from Bitcoin) experienced considerably less demand and are far harder to buy and sell in the real-time market. Investing in such assets is a sizable risk, and one that must be considered in line with your trading strategy and outlook.
• Leverage: Most commonly associated with derivative assets such as currency, leverage refers to the process of taking on debt to open a position, while it’s closely linked to ‘margin’ (which is the capital borrowed from a broker). It’s usually expressed as a ratio, with most forex brokers offering leverage of up to 100:1 and creating the potential to open disproportionately large positions. However, it’s also possible to lose capital at the same ratio, so you’ll need to be cautious in terms of the amount of leverage that you’re willing to take on.
• General Strategy: This leads us onto your general strategy, as you’re bound to encounter risk regardless of how you look to operate as a trader. For example, forex scalpers work by executing hundreds of small orders within an incredibly short period of time, which leverages the inherent volatility of the market and continual price movements. However, the propensity of the market to move against you can lead to small but incremental losses that scale out of control in some instances, and effective management is key to negating this risk.

The Last Word

Once again, you can tackle and manage many of these risks by utilising a brokerage site, which will offer you access to a host of markets, assets and tools that enable you to regulate your activity.

However, it’s imperative that you liaise with a reputable and licensed broker, as this will provide a further layer of security and additional peace of mind.

For example, reputable brokers will typically cap the amount of leverage on offer at either 50 or 100:1, whereas rogue operators will exceed such values. A good broker should also highlight various trading risks and help to monitor markets in real-time, which provides practical assistance in the quest to invest successfully.