Effective risk management is the foundation of all successful online trading and investing. In fact, it’s fair to say that it’s the key to any investment or even any activity in life. A lot of people get caught up in the excitement of opening a trading account and the very real possibility of making money. Their enthusiasm is understandable, but they sometimes forget that investing in the financial markets is inherently risky and that it’s possible to lose money on any trade.
One of the first rules of risk management is diversification. If you invest all your funds in a small number of core assets you are placing yourself at the mercy of the markets – this is seldom a good place to be – unless you are a hardcore day trader or scalper. If your assets crash you will lose your money. If you maintain a diversified portfolio with a wide range of assets you will be less vulnerable. For example, a currency may suddenly fall in value causing you losses, but share prices and gold may rise at the same time, bringing you profits. The idea is to be covered through exposure to a wide range of assets with different risk levels.
Successful traders work systematically to reduce the number of risks involved in trading and keep fundamental surprises to a minimum. Some losses are inevitable it comes with the game. The challenge is to either reduce the number of losses to a level where they are consistently outweighed by profits or have the perfect straegy and risk to reward managment. There are some investors who manage to do this month after month. While you are learning to trade this is a great way to watch your account grow and really see the potential that lies infront of you.