“Hi Timon. Losing more money than I intend is always a worry. I am thinking of cases where certain markets just drop suddenly and quickly. How do I protect my trading account? Is a stop-loss the only way, should I have a few accounts and what do you think of putting all your eggs in one basket with trading?”
A. Hi, you’ve nailed it on the head. Those are three very important measures you’ll need to take to protect your trading account.
Let’s start with…
#1: The stop loss
The only way to mitigate risk in a trade is with a stop loss.
A stop loss is a price level that you set, so when the market goes against you it will get you out at a controlled and lower loss.
With every trade I take, I always have a stop loss in place to protect my position from becoming a large loss.
Not only do I only risk at most 2% per trade, I always place a take profit level 1.5X to 2X more from my entry price.
It’s important to make sure what you’ll gain will outweigh what you can lose in any trade.
Another way to hedge or lower your risk is to diversify your trades across different markets. This will help protect your trading account. It will help you flourish in certain markets, when others are lagging.
For example, I would go long (buy) gold stocks and short (Sell) equity stocks.
That’s because gold (a safehaven in falling markets) tends to go up when stocks drop.
When you diversify and allocate your money to different markets, you’ll be able to spread your risk.
#3: Multiple Accounts
I am a firm believer in having multiple trading accounts with different brokers.
e.g. a forex trading account versus my general CFD trading account.
Forex, is a whole different market. They are a lot more volatile and there gearing (leverage) is always higher than with other markets like stocks.
And because gearing is different with stocks and Forex, it’s always a good idea to separate the two accounts.
This way you’ll be able to protect, preserve, track, analyse and monitor each market accordingly.
So, I like to have two brokers…
One broker to trade stocks, indices and crypto.
And another broker to trade Forex (currency pairs) and commodities.
Also, I find when I diversify my funds across different brokers, I always feel that my money is spread out and safer being protected in two or three different places versus just one.
PS. Something holding you back from taking your first trade? Then why not join my community of traders, who I help guide with trading ideas on what to buy, when to sell and how to lock in the profits.