Many people get started with online trading with the pure aim of making money, but the true mark of any successful trader is the ability to take care of risks too. When you keep your risks under control, you set yourself up for the possibility of maximizing rewards with consistency.

Whenever you open a trade position in the market, you automatically expose yourself to risk.

Some of the risks you are vulnerable to include:

• Market risks – The risk that the price may move against your prediction
• Leverage risk – The risk of receiving a margin call
• Price slippage – The risk that your order will be filled at a different price
• Geo–political risks – Sudden news events, like wars and pandemics
• Monetary Policy Risks – New monetary laws or interest rate changes
• Plus, many others…

Some risks even go beyond the market. Trading with a bad broker or even trading without proper trading knowledge and skill will always be risky, especially for anyone just getting started with their online trading journey.

Trading with a reputable broker like AvaTrade is one of the first ways to reduce your risk, plus with features like negative balance protection, and AvaProtect, you can have additional peace of mind.

Here are 7 ways to decrease risk when trading:

1. Always Use Stop Loss Orders

A stop loss is an order that automatically closes your trade position at a preset price point when the market goes against your prediction. The purpose of a stop loss is to limit the amount of loss you can incur in any single position.

For instance, if you buy a stock trading at $100, you can set a stop loss at $90. If prices turn lower, your position will automatically be closed when the price hits $90, thus preventing further losses on the trade.

A cardinal rule in trading is that you must always use stop losses. However, there is always the risk of your stop loss being triggered due to sudden market volatility and then bouncing back, resulting in you losing out on potential profits or taking a new position at a higher price.

It is, therefore, important to have an effective stop-loss strategy. Some of the ways to establish the optimal price point to place your stop loss include:

• Support and Resistance Levels – Place your stop loss above or below these important levels.
• Candlestick Patterns – Patterns, such as head and shoulders, have definitive levels where optimal stops can be placed.
• Indicators Levels – Indicators, such as Fibonacci and Pivot Points, provide good levels where you can place optimal stops.
• Trailing Stops – These stops automatically adjust your stops when prices move in your favour. They are ideal for locking-in profits in trending markets.

2. Cut Losses Early

A common maxim in trading is ‘cut your losses short, and let your profits run.’ It is easy to let your profits run, but it takes courage and great skill to know when to exit potential bad trades early.

It is a common human trait to believe that things will get better, even when they will clearly not. Traders should also be careful not to close good trades early due to irrational panic.

Some of the ways to determine when you should cut your losses early include:

• When the technical setup you relied upon to open the trade has been invalidated
• When a news release negatively impacts your position
• When you do not want to hold a position overnight or over the weekend
• When your emotions are getting the better of you
• When market price action no longer makes sense to you

3. Track the News

Economic, social, and political news and events represent some of the biggest triggers of large price movements in any trading session. Granted, trading the news can be very profitable. But you expose yourself to risks such as:

• Increased volatility
• Price slippage
• Widening spreads

If you already have an open position, these risks can lead to your stop loss being triggered or your entire profits being wiped out. In extreme cases, if your broker does not have guaranteed stops, you may even lose more than you have planned for.

If you intend to trade during the release of the news event, then you may incur increased costs, or your orders may be filled at unfavourable prices.

By tracking the news, you can avoid these risks by closing positions that may be impacted. Alternatively, you can trade after the release of the news when price action has returned to normalcy.

4. Trade Higher Timeframe Charts

One of the best ways to reduce risk in online trading is to trade higher timeframe charts. Many beginners are usually tempted to trade lower timeframes in the false belief that they will make more money.

However, lower timeframes expose traders to risks such as trading low-quality, low-probability setups. Trading on lower timeframe charts also encourages overtrading which increases trading costs and makes traders vulnerable to negative emotions.

Some of the ways trading on a higher timeframe helps in reducing risks include:

• They help in building patience and discipline because you have to wait for quality trade setups to form.
• You do not need to spend time on your charts, and this can limit your chances of making trading mistakes.
• Trading signals on higher timeframe charts are more solid and can give you a better risk/reward proposition.
• Higher timeframes tend to filter out market ‘noise,’ which can help you keep emotions in check.
• They simplify your trading activity.

In online trading, higher timeframes generally refer to 4-hour charts and above. While lower timeframes can be good for timing entries. The bottom line is that trading off higher timeframes gives you a better market perspective.

It is important to note that the best timeframes to use will vary by asset class. For example, when day trading cryptocurrencies, prices can swing wildly in a matter of minutes, whereas stock prices may only shift mildly for the same timeframe.

5. Avoid Amplifying Risk with Correlated Assets

Correlation is a measure of how prices of different assets move in relation to each other. Positively correlated tend to move in the same direction, whereas negatively correlated assets tend to move in opposite directions. When opening multiple positions in the market, it is important for traders not to magnify their risk exposure by trading correlated assets.

For example, the EURUSD and Gold tend to be positively correlated. So, if you take a position on both assets, you are essentially multiplying your risk exposure. Alternatively, the EURUSD and USDJPY currency pairs are negatively correlated. So, if you buy EURUSD and sell USDJPY, you are also increasing your risk exposure.

Understanding correlation can also help in building a well-balanced portfolio.

6. Use Trading Calculators

Using trading calculators is a practical way of reducing risk while trading. Trading calculators are useful tools that can help traders plan their trading activity efficiently.

Some of the types of trading calculators that can help traders minimize trading risks include:

• Position size calculator – Use this to accurately determine the ideal position size depending on the asset you are trading, your preferred risk amount, and stop loss level.
• Margin calculator – Use this to determine the margin you require for your trade position according to your level of leverage and position size.
• Drawdown calculator – Use this to determine how a series of consecutive losses will impact your trading capital.
• Profit calculator– Use this to determine the expected amount in profits and losses based on your entry and exit prices as well as position size.

7. Use a Trading Plan

Ultimately, the best way to reduce risks in the market is to treat online trading like a real business. This means having a trading plan that will guide your entire decision-making when you are trading online. Some of the elements that will be included in your trading plan are:

• Trading goals
• Trading strategy
• Risk management plan
• Your trading journal
• Your trading psychology

How will a trading plan help you enhance risk management while trading?

• It will keep you accountable.
• It promotes discipline and consistency in your trading actions.
• Will help you identify weaknesses in your trading skills so you can improve on them.
• Ensures you maintain objectivity with your trading decisions, and thus avoid the negative impact of subjective emotions.