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How to manage trading risks

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There were few silver linings to the impacts of COVID, but one was the rise in new traders hitting the market.

Changes to working conditions gave many newbies the opportunity to try their hand at investing.

By now, most would have felt the thrills of the highs and the disappointment of the lows.

While riding the ups and downs informs personal learning, winging it doesn’t always work long term.

Those who want to stick at it need to know how to manage their risks. Even the most experienced traders need to scrub up on their risk management techniques at regular intervals.

This is particularly the case in the current post-COVID-19 trading scene, which may bring with it more volatility than ever.

Successful trader
Successful traders have entry and exit strategies to guide them in knowing when is the right time to buy and sell. Photo: Getty

While recovery steps are positive thanks to the worldwide vaccine rollout and reactive government measures, there’s a heightened risk of changing monetary policy, said Matt Weller, City Index global market analyst.

“From a macroeconomic perspective, the risk of inflation and interest rate rises is more elevated than it’s been in over a decade due to the unprecedented fiscal and monetary stimulus,” he said.

Planning trades is the first step in risk management and to do this, novice traders can use stop-loss (S/L) and take-profit (T/P) risk mitigation measures.

Setting stop-loss and take-profit points are needed to calculate expected return, which is useful to know when selecting trades.

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Successful traders have entry and exit strategies to guide them in knowing when is the right time to buy and sell.

But market timing isn’t a precise science and these strategies need to constantly be finessed.

And there’s the non-negotiable rule of diversification.

Investing across a wide range of assets lowers your risks and is more likely to result in higher returns.

Even with the best of strategies in place, trading is not a set-and-forget exercise said Tony Sycamore, City Index market analyst.

“New traders need to be aware that there are no shortcuts to becoming a good trader,” he said.

“It requires patience, hard work and discipline. The worst thing a successful trader can do is to become complacent and let their guard down.

“This is when the market likes to provide a reminder it’s still got a trick or two up its sleeve.”

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All trading involves risk.