Online trading can be quite a great source of extra income especially during such times when working from home has become the norm. You can trade forex, CFDs, binary options or do spread betting which is tax-free in South Africa.
However, though trading forex and other leveraged financial instruments are highly rewarding, it also involves momentous risk and could result in the loss of your invested capital. Therefore, you will require to understand how to best mitigate the risks.
Tips on how to minimize the risks of trading
1. Trade with regulated brokers
Choosing a forex broker, a binary options broker, a CFDs broker or a spread betting broker is the first step in online trading.
For your trading experience to be successful, you need to select a trading platform and a broker that will allow you to trade with the tools and strategies that your broker offers.
There are a number of brokers that allow automated trading, such as Fidelity Investments. Look for a broker that allows social trading if that is something you’re interested in. Any trading done on the go requires a broker who offers mobile trading.
Regulated brokers are essential when selecting an online broker. Regulated brokers guarantee the safety of your money. Unregulated brokers can close their websites and take your money, which has happened to some traders.
You don’t have to use a licensed broker in South Africa if you declare your income to the government and follow financial regulations to prevent money laundering, but it’s in your best interest to do so. An FSCA or any other top-tier regulatory authority around the world can help you find the best broker for your needs.
2. Consider your level of experience and investment objectives
This will help in making an informed decision on the type of trading account you should look for. Different brokers offer different account types that have different features that are usually tailored according to the experience of the traders.
There are those accounts that are best for beginners while there are others that are best for professional traders. Some of the features of an account that is suitable for a beginner include high maximum leverage, low minimum investment amount (lot size), low initial deposit amount, and access to a personal account manager and trading tutorials.
3. Only invest the amount you can afford to loose
Forex trading or trading other leveraged financial instruments could result in the loss of your invested capital due to the volatility of the financial market. Therefore, you should invest an amount that you are ready to lose.
One of the ways of investing an amount that you are ready to lose is by depositing only that amount of money that you would lose without being affected financially.
Secondly, you should use the least possible lot size when opening trades. Although high lot sizes are associated with higher returns, it also means that in case of losses they are also associated with higher losses.
Thirdly, you should avoid opening too many trades at the same time. Your trading strategy should only allow you to risk about 20%-30% of your account balance at any given amount of time. This way you will be able to hold trades for long without the risk of your account being wiped out in case the trades start by registering losses.
4. Use a demo account
When looking for a forex broker, it is also important to look for a broker that offers a demo trading account. The demo account allows you to understand how the broker’s platform functions and also give you a chance to practice in case you are a beginner.
Also, the demo account offers a platform for testing your trading strategy to ensure that it is profitable before using it to trade on the real account. The demo account involves virtual money and therefore any losses incurred are not real and will not affect you.
5. Use risk management strategies when trading
Finally, your trading strategy should include some of the common risk management strategies like the use of stop-loss, take profit, and trailing stop levels.
The stop loss levels help in containing the amount of loss a trade should close at in case your market speculation was wrong. The take profit and trailing stops, on the other hand, enable you to exit the market at the best point with profits before the market reverses and the trade turns into losses.