KT Explains: What are the risks in investing, and how to tackle them

Dubai - It is essential to research and fully understand the process so that you do not throw money.

By Shajar Khan

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Published: Mon 21 Jun 2021, 2:36 PM

According to Monte Safieddine, a market analyst at IG, a British company providing trading in financial derivatives such as contracts for difference and financial spread betting, it is vital to know your risk appetite when trading. One of the problems he has noticed is that people tend to only think of a win and are not well prepared if a loss occurs. As human beings, we do not accept a loss and many cannot admit to a loss publicly.

This could also apply to an institutional fund manager. Even some of the best fund managers always put risk parameters and always try to limit their losses. When something is going in your favour, we tend to take profit right away because we see it go up. An example of this is Bitcoin. It can go from $50,000 to $60,000. If it comes back to $55,000, people get scared and close, which means that they decide to take their money and profit. They do not want their position to go from a profit to a loss. Once panic sets in, they close. This means that they make a profit at a minimal amount. When the trade is not working in their favor, they assume that the market will recover and continue to hold onto it until the end.

What is gold/forex trading and how does it work?

It would help if you had risk parameters before going into a trade. For example, at a 5% return, you should not risk more than 5% ideally. Your risk to reward ratio should be equal or smaller. It is better to aim for 5% gains or 2-3% loss maximum.

When it comes to trading, it is essential to research and fully understand the process so that you do not throw money in one direction or the other. If you do your homework and it goes down for whatever reason or unforeseen circumstance, you can say that you have taken a loss and do not view it as a gamble. You took this as an investment or trading decision and not just a flip or a coin toss. In this situation, you decided to approach the market with knowledge and direction.

When it comes to investing in gold, you are buying for the long run or buying and holding for the long term. If you are looking to buy gold for the long term, there are many options which include a futures contract. The procedure is simple. Another example is buying physical gold, where you could go into a mutual fund that will buy the gold for you or buy gold mining stocks depending on your preference and what you like. This only applies when you are looking at investing and not looking to trade.

How can I trade in gold? Should I opt for a mutual fund?

Gold miners are usually hedged which means that they have covered themselves in the financial market, ensuring that they can short themselves. If prices do come down, they might be partially hedged depending on the company. This allows them to cover their mining costs and try to make a premium. They are not investing in gold. If gold prices rise, they cover their cost and then sell it off at a price.

It is important to note that there is a risk that a company can go bankrupt. However, gold as a commodity cannot go bankrupt.

What are some of the key mistakes that people make when trading?

According to Safieddine, people hold onto losses for a very long time and quickly take profit. That means that there is an imbalance when it comes to risk-reward. Risking $10,00 to make $100, which means that when it goes wrong they have lost $1,000 and when they get it right they made only $100.

You should try and flip it, instead of risking $1000 to make $100, try risking $100 to make $100 at least if not $50 to make $100.

People have trouble accepting a loss and have difficulty telling people publicly that they have lost. When it comes to losing or trading ahead of time before you even make the trade, do not look at how high the price can go in your favour. Look at how much it could go against putting a stop loss in your platform. For example, you put a stop loss which says if it reaches this price level close out the position.

With a stop loss, you ensure that you have a strategy to limit your losses and accept that it could go against you. It may not have gone against yesterday. However, it can go against you today.

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