While investing is considered to be a completely different practice to gambling, there are some parallels including the inherent risk of loss and diverse range of factors that can derail even the best-laid plans.
For example, it’s estimated that up to 70% of forex traders regularly lose money over time, while 82% of those who engage in CFD trading also fail to make a profit.
The question that remains, of course, is what steps can you take to become one of the minority of traders who achieves profit and success? Here are some ideas to keep in mind:
#1. Planning, Planning and More Planning
Planning is central to the success of every investor, although the nature of your preparation will vary depending on your chosen market and investment strategy.
For example, those of you who engage in ‘scalping’ will have to do large quantities of research and execute a high volume of orders during a typical 24-hour period, while as a ‘position’ trader you’ll look to achieve long-term gains through a much smaller number of orders.
Even before you start to execute orders, however, you’ll need to identify your preferred asset classes and the precise investment vehicles that you’ll use. This also requires research and preparation, while the use of a demo account can also be instructive in this respect.
Through a demo account, you can bridge the gap between theoretical market knowledge and practical trading experience, as you look to experiment with different strategies and plan more effectively over time.
#2. Diversify Your Interests
When building an investment portfolio, the key to long-term success lies with diversification. This involves distributing your capital across a number of different markets and asset classes, in order to minimise your exposure to risk and deliver more consistent returns.
When first starting out as a forex trader, it’s recommended that you initially trade one or two major currency pairs (in order to optimise liquidity and ease yourself into the market). Over time, however, you can look to trade a broader range of major and minor pairings, while also considering exotic alternatives that are considerably more volatile.
Then, you can expand into additional markets depending on your precise knowledge base and outlook as a trader, as you look to build a portfolio that looks to strike the ideal balance between risk and reward.
The key is to regularly review and update your portfolio over time, while remembering to avoid the risks posed over diversification and potentially diminished returns.
#3. Understand the Importance of Risk Management
When managing your trading account and portfolio, it’s also important to actively manage and reduce your risk if you want to achieve and sustain success.
Fortunately, contemporary trading platforms are packed with practical risk management tools, including stop losses.
With stop losses, you can ensure that open positions are closed once they’ve incurred a predetermined level of loss, minimising your risk and capping losses in instances where the markets move against you.
By using this type of tool, you can manage your risk effectively in real-time and prevent extensive losses that may be exacerbated by leverage.