Unfortunately, it is far too often to hear and read about those who are interested in trading lose some or even all of their money. In this article, we’ll give you 5 golden rules that will help you protect your money.
#1 Knowledge can protect you against Total Loss
Knowledge is the foundation of everything that you do daily and it is a prerequisite to minimize risk. You’ve learned how to drive a car, speak a foreign language, practise your job or ride a bike. You would never think of putting yourself in the cockpit of an airplane, building a bridge, or flying to the moon without sufficient knowledge and training, would you? All these things are done only by people who have learned that.
Likewise, you should tackle the topic of finance and trading with the same approach. It’s a kind of job that can only be done with knowledge. Curiously, take a close look at the financial markets, unbelievably many beginners with very little or no existing knowledge trade with real money. The motivation for this action is easy to identify: Get rich quick! These “traders” will in most cases suffer a total loss in a relatively short time.
Learning should always be placed in the first place, the extensive benefits of a demo account is enormously important. Learn in a risk-free environment and achieve steady returns before you use real money, which you have certainly worked hard for!
#2 Proper Broker Choice as a Protection
The choice of a right broker is also of utmost importance, although not necessarily at the beginning of your trading career. If you want to trade with larger real money amount at some point, you should pay attention to the following things when choosing brokers:
- Regulation of the broker
- Offer of real shares, options and futures
- Deposit insurance that covers your deposit
- Existence of the broker in the market for several years
- Good accessibility
To put it bluntly, if you deposit your money with a small broker who has only been on the market for 10 months and settles in Bangladesh for example, you should not be surprised if you suddenly cannot log in and never see your money again.
#3 Money Management as a Foundation
If you have followed the first two tips, the risk and money management is the mainstay to keep your account “alive” and ideally grow steadily.
Our advice to you is: Never risk more than 2% of your account in a single trade!
Basically, we can still advise that the bigger your account will become, the less risk should be taken. The reason is very simple: replacement value. Replacement value means the effort and discovery that must be made to recapture this capital. Let’s say you lose $400 then you can save that amount in a relatively short time. It looks different, however, if the account has a size of $10,000. For this reason, the risk should decrease with increasing account balance.
#4 Patience and Discipline in Trading
Many newcomers and even advanced traders are desperately looking for the next trade. They often enter trades that do not originate from a good setup or they violate rules of their strategies. They have no patience and do not remember that missed trades can improve performance. Few good trades are better than many bad trades.
Of course, there are down times and drawdown that will put a mental strain on you, but always keep in mind that this is part of the whole thing. It cannot always go up. Do not forget to lose sight of the big picture. If you lose 7% in one month, remember that your annual goal is still achievable.
Again, the knowledge will help you. Learn to improve your trading psychology and mindset.
#5 Realistic Expectations on Returns
Last but not least, realistic expectations help to protect your own account. That may sound weird at first, but we’ll explain it to you.
If you have an adequate money management and still expect a return of 100% per month, then something will go wrong. Opportunities and risks always go hand in hand. If you are aiming for a constant, annual return of 25%, which is quite realistic, then you quickly realize that you do not have to earn 5% per month. With a realistic expectation on return, you take the pressure off. You will be able to trade in a much more relaxed way and can handle the smaller losses much better.
Please do not make all the mistakes and still expect a good month for the year. This ends up in a naive miscalculation. Such an approach destroys the reality completely!
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