By Uchechukwu Okwum,
Every investment approach is ripe with risks, even if benefits often balance them out. New traders should learn about the potential downsides of the market to avoid unnecessary stress and disappointment. And who can better advise on trading risks than Paul Belogour, an experienced trader, founder of BMFN and other successful ventures? Mr. Belogour was kind to share three critical risks every novice investor should acknowledge before spending a single dollar.
Extreme Market Volatility
While the foreign exchange is a significant investment market, it is prone to extreme volatility. While it provides a chance for high earnings, it also makes the market unpredictable. Some newcomer investors expect major currency pairs to remain stable, and they lose thousands of dollars whenever a political or economic uproar occurs. The new legislation, embargoes, elections, and even a tweet by the President can disrupt the careful balance and cause huge losses.
According to Mr. Belogour, to mitigate this risk, traders should experiment with new strategies using demo accounts. They should also pay attention to the significant political and economic disruptions, international deals, and new technologies that can help analyze the influx of data and make accurate fluctuation predictions.
Poor Market Depth
Market depth defines the price volatility in case of a large enough deal. Deep markets possess a significant volume of orders on ask and bid sides to ensure the price remains at the same level without severe fluctuations. The lower the amount of pending orders, the worse the liquidity of the security is, and the higher the risks are.
While serious investors can influence the markets with poor depth by securing large enough deals, most traders have to ride out the resulting wave. Therefore, to avoid unexpected price crashes, Pavel Belogour advises traders to focus on deep markets of high liquidity. They might not offer the same earnings, but the risks of losing everything will be much lower.
Unexpected Margin Calls and Stop Outs
When investors rely on brokers, margin management becomes a priority. Investors need to pay close attention to the maintenance margin and ensure their equity percentage does not go below the number specified in the broker’s contract. If this happens, the broker is within the rights to initiate the margin call or stop out and liquidate the investor’s share of the equity until its percentage is above the margin.
Pavel Belogour reminds investors, that margin calls and stop outs lead to significant losses. Traders must either submit additional payments to the brokers or lose their equity in full or in part. It is advisable to keep the margin above the minimal maintenance level at all times and avoid extreme volatility periods when the margin can swallow up the earnings and cause major losses.
When you see successful traders, such as Paul Belogour, do not forget the risks every investment approach brings. Do not let a few profitable demo account deals go to your head and remember to account for extreme market volatility, poor depth, and keep an eye out for margins. These simple rules will help you avoid major trading risks.