Trading Risks: How to Maintain Profits When the Market Is on the Brink?

The world of investment not only offers the opportunity to earn high returns, but it’s also a never-ending battle against uncertainty. The risks of trading lurk for anyone who decides to invest their money in stock market transactions. Even the most experienced players with extensive market knowledge are sometimes forced to deal with unpredictable changes.

What risks do investors face when trading? From systemic errors to human errors

Trading is like walking a tightrope: one step forward seems to promise success, but one false move can lead us to the bottom. Systemic risks, such as economic crises and macroeconomic changes, pose a threat to all market participants without exception. For example, the significant interest rate hike implemented by the US Federal Reserve in 2023 caused stock indices to fall 10% in just one month, forcing investors to rethink their strategies.

Furthermore, the human factor also plays an important role: wrong decisions, errors in assessing the situation, and overconfidence in one’s own abilities. For example, the 2008 global financial crisis was the result of systemic factors that ruined millions of investors. Due to inadequate analysis and careless decisions, many people lost their capital. According to a Harvard University study, around 65% of investors made emotional decisions that increased their losses.

Investment risks in trading can also arise from high volatility. Imagine that an asset has dropped dramatically in price due to a regulatory statement, and now the investment portfolio is already in the red. For example, in March 2020, due to the COVID-19 pandemic, the stock prices of many companies fell by 30 to 40% in just a few weeks. Therefore, it is important to pay special attention to a thorough analysis and have several strategies prepared for unforeseen situations.

Survival Strategies in Unstable Conditions

In the face of uncertainty, investors can choose from several survival strategies. One is to avoid sudden actions and not panic-sell assets when prices fall. Holding and cold-calling can avoid panic losses and wait for the market to return to normal. For example, investors who did not sell their stocks in March 2020 had already recovered their losses by the end of the year and realized profits when the market returned to pre-pandemic levels.

Risks:

1. Systemic risks: economic changes, changes in central bank policies (e.g., the ECB’s decision to raise interest rates in 2022), changes in tax legislation (2021 tax reform in the US).
2. Human errors: emotional decisions, overconfidence, lack of discipline.
3. Liquidity risks: the possibility of losses due to insufficient liquidity in an asset. An example of this is the situation with cryptocurrencies in May 2021, when a sharp drop in their value caused trading to be halted on some platforms.
4. Market risks: fluctuations in exchange rates, interest rates, and commodity prices. In 2023, oil price fluctuations caused losses for numerous energy companies that were unable to hedge their risks in time.

It’s important to understand that risk analysis in trading helps anticipate potential problems and take preventive measures.

How to Minimize Trading Risks: Working Strategies

One of the most important ways to minimize risk when trading is to set clear loss limits. By using stop-loss orders, you can avoid large losses. For example, if the price of an asset falls below a certain level, the system automatically sells it, thus minimizing losses. This is especially important in conditions of high volatility. When Tesla’s stock price plummeted 25% in just a few days in 2023, many investors were able to minimize their losses by placing stop-loss orders.

How to deal with volatility and stay in control

To deal with volatility, you need to keep a cool head. Avoid assets that are subject to strong fluctuations. For example, small-cap stocks tend to have high volatility, making them risky. Additionally, partially closing positions helps control losses. If the price drops sharply, you can close part of the position to minimize potential losses. This strategy helped investors preserve 15–20% of their capital during the cryptocurrency market crash in 2022.

Capital Management: From Theory to Practice

Risk management strategies in trading also include proper capital allocation. It’s too risky to invest all your money in a single asset. It makes much more sense to spread investments across multiple segments. For example, if one asset fails, other assets can offset its losses. When technology stocks suffered a sharp decline in 2021, investments in gold and government bonds helped offset some of the losses.

Investment Diversification as a Primary Risk Management Method

Investment diversification involves spreading capital across different types of investments, thereby reducing potential losses. For example, if a company’s stock price falls, investments in other sectors can offset the decline. According to Morningstar, diversified portfolios lose on average 20% less value during recessions than non-diversified ones.

The Best Ways to Diversify Your Capital

There are several basic methods:

1. Investments in various sectors: technology stocks, energy sector, consumer goods sector. For example, investing in Apple and Chevron stocks helps offset the risks of the technology and energy sectors.
2. Geographic diversification: Investing in companies from different countries. This reduces the risks associated with economic instability in a given country. For example, investments in companies from the US, Europe, and Asia help mitigate the effects of economic crises in some regions.
3. Investments in various asset classes: stocks, bonds, precious metals, real estate. In 2022, when the stock market showed negative momentum, investments in gold increased by 10%, helping investors offset some of the losses.

Capital management in trading is impossible without understanding the need for diversification. It’s like insurance that protects your investment against total loss.

Conclusion

The risks of trading can and should be minimized by using smart strategies and approaches, such as diversification and setting stop-loss orders. The most important thing is not to panic and remember that the market always moves in waves: a fall is followed by a rise. Use the methods described to preserve and increase your capital and let the market’s waves work for you, not against you.