When you’re a trader, you’re always playing with the words ‘risks’ and ‘rewards.’ And of course, if you’ve been studying up about this game, you’d know the basic rule: higher rewards mean higher risks.
Now, you may think that the reverse is also true. But, in fact, higher risks do not necessarily mean higher rewards. This is because we sometimes incur unnecessary risks.
Therefore, it is important to understand you own risk tolerance. This also refers to your risk appetite, or the amount of risks you are willing to withstand in exchange for an amount of potential reward. You also have to create strategies that can minimize the amount of risks you have to endure.
Here are some tips that can help you avoid the risks in your investments.
Of course, this is one golden rule of thumb in the world of investors. Never put all your eggs in one basket if you want to stay in the game for the long haul. When you diversify your portfolio, you minimize the overall risk your portfolio has to suffer. Just imagine if you concentrated all your money on stock A, and stock A suddenly crashes or goes out of business. You have to say bitter goodbye to your investments.
Keep close eyes on your investments
Monitoring your investments on a regular basis and on an efficient way is very crucial for a successful portfolio. You have to keep tabs on the performances of your investments. Read the news and keep yourself updated with everything the industry does.
Monitoring your investments closely will help you see which risks are coming. And since you know which they are ahead of time, you’d have time to prepare or even find a way to avoid them altogether.
Aside from monitoring your investments, you also have to perform the proper and sufficient amount of research about them. Researching involves going back in time (not literally) and checking how the investment performed in the past.
You also have to know the history of its growth, earnings, management changes, and debt load. Inasmuch as you know these things, it’s equally important to know how to interpret them against the present condition of the company and the most current information about it.
The future can be easier foreseen then, if you successfully and accurately interpreted the data you have gathered. In other words, you need to use the investment’s past and present to predict its future. And you’re going to use your prediction to know what lies ahead for your profitability.
Do not forget Stop Loss Orders
A stop loss order is a tool placed on a stock. This automatically triggers the stock’s sale when it goes lower than a predetermined price. A stop loss order is there to limit or stop the losses you may incur in a trade.
It is very common for rookie traders to lose huge amounts from their investments simply because they forget to or don’t place stop loss orders. Bear in mind that it has been proven that stop loss orders help minimize losses and maximize profits.