Making money on the stock market involves being highly skilled at risk management. Without proper risk management, traders are leaving a large portion of their potential returns up to luck. Successful stock traders that have consistently beaten the market incorporate vital risk management strategies into their daily trades, allowing them to achieve the highest gains possible. Stock traders that are looking to improve their daily profits should follow this article to learn about key information all stock traders should know when trying to beat the market.
Never Neglect Foreign Exchange Rates
In the globalized trading economy, it’s immensely common to trade in commodities and shares from foreign countries. Trading in investments that are available overseas is a great way to diversify trading strategies as well as gain access to new and dynamic markets. However, there are many risks that come with trading in foreign investments. One of the biggest risks that occur when undertaking this type of stock and commodity trading is foreign exchange risk.
Foreign exchange risk is the risk that the currency rates between the two countries will change unfavorably for the trader. There are many instances where traders have been able to make a huge return on foreign investment, only to lose the majority of these gains to foreign exchange fluctuations. The foreign exchange market can be highly volatile, especially when dealing with currencies of smaller and less developed nations.
Successful stock traders have to always incorporate foreign exchange risk into any sort of overseas trades that they conduct. Otherwise, they risk opening themselves up to situations where they may earn a large return initially, only to lose most of it to exchange fluctuations. The volatility of exchange rates is perhaps the biggest downside and risk that comes with trading in commodities and shares in smaller and less active markets.
Thankfully, there are ways stock traders can hedge their risks regarding foreign exchange fluctuations. Combining daily trading strategies with forex options and futures to lock in a given exchange rate is a great way for a trader to ensure that they won’t be caught out due to a sudden change in exchange rates. Utilizing options and futures for hedging can be costly for a trader, however, if it allows them to hedge any possible exchange fluctuations it may be worth the money. At the end of the day, it is about how much risk a given stock trader is willing to handle in their daily trades.
Beware Large Transaction Costs
Lots of new stock traders often overlook the significance of transaction costs. All trades will involve some sort of transaction cost, and sometimes, these costs can be tremendously high. Lots of traders that are involved in markets that are hard to access and have little daily volume experience very high costs of trading. The reasoning behind these high transactions costs is the fact that finding buyers and sellers can be very difficult in smaller markets. Hence, market makers that facilitate deals within these sectors usually charge very high fees for transactions.
Stock traders that don’t take into account transaction costs when trading in markets with small volume often don’t realize that their total profits are much less than what they may imagine. Although initial return may be high, if lots of transactions are required in order to successfully complete a given trading strategy, the costs of the transaction may quickly diminish most of the total return. Hence, just like with foreign exchange, traders have to always be aware of all of the small costs that are incurred when executing a given trading strategy. Simply looking at the baseline return from a given trade is not enough to accurately predict the actual return.
Traders should always be aware of the downside of higher transaction costs when dealing with smaller and more exotic markets. In addition, problems such as being unable to execute trades due to lack of buyers and sellers are common in these markets. Thus, although many smaller markets seem to be attractive due to higher relative returns, there is a price to be paid for participating in such markets.
Stock traders have to take into account factors such as liquidity of the markets, costs of the transaction and foreign exchange risk when creating the best trading strategy possible. This way, any potential factors that can lower total return can be accounted for beforehand.