Social trading has made it easy for new traders to find new opportunities and enter the world of trading. Using easy strategies and collaborating with experienced traders, they can learn and profit right from the start. However, there are some risks that demand some serious attention, too.
Along with the increased potential for gains, social trading also comes with a fair share of risks, which need effective risk management from a trader’s side. If you learn to cater to those risks, you can be on your way to becoming a leader in the trading world and a role model for others to follow.
Read the below-mentioned risk management techniques to implement in order to achieve the desired results.
- Position Sizing
Position sizing is a term used to define the amount you invest in each trade. This amount depends on your account size and risk tolerance. Generally, all experienced investors follow the 1-3% rule. In this case, the maximum risk that remains with every investment is only a small percentage of your total capital.
The biggest benefit of this approach is that even a couple of continuous losses won’t affect your account that much. This will allow you to stay in the trade even when the times are difficult for every trader out there.
Let’s take an example to explain How social trading works in position sizing. For example, if you set aside capital of $10,000 and go with the rule of 2%, then you are just risking $200 on each trade.
- Utilizing Stop-Loss Orders
Stop-loss orders are the first thing that can save you from unexpected market fluctuations. A stop-loss order is a price level that is predetermined to sell a particular stock at a decided price. This risk management technique saves your investments from getting lost by saving you from making emotionally based decisions.
When you set a stop-loss order, you are actually limiting your losses. However, stop-loss levels also need to be determined with extreme care. When setting these levels, consider technical analysis, resistance levels, and volatility of your assets. This will enable you to set a well-researched stop-loss and minimize your chances of severe market changes.
- Diversification
Diversification is the most powerful of trading tips and an effective tool recommended by expert traders. As obvious from the name, diversification means dividing your capital for trading into different traders and markets. This will decrease your chances of losing all your money in one go.
Diversification works by preventing overconcentration in a single asset class or trader. This way, when a market crashes or experiences fluctuations, you only have the risk of losing a small percentage of your money. This approach stabilizes your portfolio and makes you well aware of different traders and markets.
However, when diversifying your portfolio, make sure to have the right balance between all the trades, markets, and asset classes. You will also have to make sure you are continuously monitoring each asset and trader in order to get effective results.
