When it comes to online trading, it is impossible and especially wrong to look only at the possible gains. The risks of online trading are in fact always lurking and cannot be eliminated. How to do then? The main thing to remember is the fact that the risks mentioned above can be kept under control and minimized.
If you’re wondering how, we’ve created a guide to answer your question. This is a review of 6 simple tricks, thanks to which you can minimize the risks online trading and know the characteristics of brokers that ideal for operating safely and in absolute legality.
As you can see immediately below, we have also created an index, which you can use to choose the topics that interest you most and deepen them.
Trading online how it works: The importance of the right tools
Analyzing online trading risks and the tricks needed to minimize them means first of all considering the right tools to operate, i.e. the CFD (Contracts for Difference). Derived derivative instruments for about 20 years, allow to operate by replicating the asset trend. They represent the most effective trick to minimize the risk of volatility, which characterizes virtually all assets available on brokers.
Thanks to them, in fact, it is possible to run regardless of their performance and obtain profits even in the event of a loss of quota. What matters, in fact, is to open the right position between long (purchase) and short (sale), setting the trend from time to time.
CFDs are undoubtedly very advantageous when it comes to trading: simple to manage, provide the spread as the only economic burden (there are no commissions). But we must consider that these are leveraged products. This means that both gains and losses are amplified. In this case, the excellent level of confidence with stop loss mechanisms is of great importance, thanks to which it is possible to indicate to the broker the right time to stop the losses.
Although we often talk about buying cryptocurrencies and stocks, CFDs are the best solution to manage these assets. To help you understand the importance of Contracts for Difference, let’s take the example of 2017, the golden year of cryptocurrencies. This year things have changed a bit and this has made people shout at the end of the asset. With CFDs, it was possible to overcome the loss of quota, which involved many people who had chosen to buy.
Secure online trading: The advantages of Money Management
We reiterate: when doing online trading, we need to focus on the fact that some operations may be at a loss. Even the best traders have to deal with this aspect and face it with a simple and important trick: Money Management.
When naming this strategic approach, it is necessary to identify different steps. Here are the following …
- Point of the situation on available capital.
- Assignment of 2/3% of the total capital to each individual transaction.
- Recourse to the stop loss after opening the position.
Once these steps are completed – as you can see they are very simple – we need to consider the drawdown, which is the maximum risk of the portfolio. In this phase, the trader must consider the possibility that all the set stop losses are triggered. In these situations, those trading must find themselves with sufficient capital to continue operating.
In this way, you can manage the situation and monitor the negative effects of various unhappy operations.
Beyond the numbers and percentages, there are also some universal practical rules. Here are the following …
- Avoid too pretentious expenses.
- Choose, when possible, the most advantageous alternative from the economic point of view.
- Increase expenses on the most fruitful front.
- Frame the expected benefits of every desired expense.
Together with what has just been mentioned, two formulas are important in Money Management, namely that of Kelly and that of Larry Williams.
Kelly’s formula, born in the field of gambling, has been used in online trading to understand well how much to allocate to every single operation. Kelly’s formula is as follows …
F = W (1-W) / R
Let’s see each element starting from F, which indicates the individual online trading operation. W, on the other hand, represents the probability that the single result is positive. R, on the other hand, is the average value of shares closed in positive and those closed in negative.
The formula of Larry Williams is instead its evolution. Thanks to it, it is possible to calculate the probability that the actions carried out on the market go in a different direction than the one foreseen.
The formula is as follows: F = (Capital x Risk %) / maximum drawdown.
F is always the single operation, while the drawdown is the sum that you are willing to lose. The results can be very uncertain, which is why the trader should not consider them as excessively binding.
Online trading reviews: Pay attention to the forums!
When it comes to minimizing online trading risks, it is worth mentioning the importance of paying attention to reviews on forums. These spaces, in fact, are the receptacle of the outbursts of failed traders.
The worst however regards another aspect. In fact, on the forums, fraudulent systems are often advertised that promise stratospheric gains from one day to the next. Those who have no experience with online trading can be tempted by these promises, but do not fall into temptation.
Any site / system affirms the possibility of gaining overnight without risk, is a good and good scam perpetrated by hackers who disappear with money. As we will see shortly, serious brokers immediately explain that online trading with real money is characterized by unavoidable risks.
Risks and advantages of online trading: The demo account
The risks online trading, we repeat, exist but can be kept under control as soon as you start operating. A very useful trick in this regard is to open the demo account. We will better analyze its advantages in the next lines. For now, we just remember that the demo account, as the word itself says, is an account with no real money, unlimited and free.
All serious brokers allow you to open it, allowing those in the very early arms with online trading to familiarize with both the platform and the specific asset. When it comes to demo account, moreover, it is good to specify that whoever opens it is in no way obliged to proceed with the real money account.
Trading agrees or not: Portfolio diversification
Another trick dedicated to those who want to minimize the risks of online trading concerns the diversification of the portfolio. Agree that with iCFD you can earn even if the asset loses share, but it is good to remember that, in any case, the assets are different and it is advisable to distribute the capital in a targeted manner, recalling the aforementioned rule of Money Management.
Serious online trading: Reliable brokers
The sixth and perhaps most important trick to keep under control and minimize online trading risks is the choice of the broker on which to operate. As already mentioned, reliable platforms are characterized by extreme clarity regarding the level of risk of online trading.
Another important aspect concerns legality. When it comes to serious brokers, in fact, it is appropriate to include only the platforms characterized by the presence of the Cysec license and the authorization by the Consob or the FCA.
On this last aspect it is the case of very careful attention. If you do not notice anything about what you just said when you are in front of an online trading platform, it is appropriate to close and apply elsewhere.
By virtue of the aforementioned legal aspects, those operating on reliable brokers have every guarantee that they will not be defrauded. This does not mean that, automatically, all operations will be successful. However, we reiterate the certainty of having entrusted their money to a serious company, which responds to international rules and which protects the substances of members from the first filing.
The brokers worthy of consideration also allow you to open the demo account and start operating without real money.
The risks online trading are always lurking. Eliminating them is not possible but, as we have just seen, you can keep them under control. The points indicated at the beginning of our guide are strongly linked to the choice of the platform.