Online trading

Most Retail Investors Lose in Online Trading – Beware of These Pitfalls

E-commerce has become very popular these days as young people look for alternative sources of income and free themselves from their usual 9 to 5 jobs.

While online trading may have been “gamified” (not thanks to social media advertising and online investing gurus) and many young traders think it’s a quick way to play and making money, it doesn’t change the fact that there is an inherent risk of a casualty count of over 85% of traders losing money.

There are common pitfalls in online trading that traders should avoid, regardless of the market they are trading in.

  1. Choose a scam broker

Brokers act as intermediaries and connect you to the markets. Their integrity would go a long way in defining your trading experience. This doesn’t mean they work for charity, but their fees should be on par with or even lower than other brokers, and they shouldn’t mislead you.

There are so many scam brokers, especially targeting the general public all over the world, but these scams are more common in Asian and African countries, where the markets are not well regulated, and there is a general lack of awareness. to these scams.

This is not to say that investors from Europe or the UK, for example, do not fall for scams and dishonest brokers. The FCA UK regularly issues warnings against scams and clone brokers who defraud investors in the UK.

To ensure that the broker is legal in your country, they must be licensed by a regulatory body and must hold a valid license to accept clients. Some brokers may even hold more than one license from different major regulatory bodies in the EU, UK, Australia and other regions, which can give traders additional security.

Karan from Safe Forex Brokers explains this with an example. If you want to trade CFDs or currencies from the UK, you need to find an FCA-licensed UK forex broker to ensure that your funds are safe and that you have investor protection. If you are trading through an FCA regulated CFD broker, your funds up to £85,000 may be compensated under the Financial Services Compensation Scheme (FSCS), in the event that the broker goes bankrupt.

If you are in Europe, the European Union has the European Securities and Markets Authority (ESMA), the United Kingdom has the Financial Conduct Authority (FCA), the United States has both the Securities and Exchange Commission (SEC ) and the Commodity Futures Trading Commission (CFTC). ), while Australia has the Australian Securities and Investment Commission (ASIC), etc.

These are just examples of capital market regulators in some major countries. A broker could hold multiple licenses, for example from FCA and ASIC, which would make them a lower risk broker.

To check if your broker is legit, go to the website of the relevant regulators and see if the name of the broker is on the list of approved brokers generally published by each regulator. It is generally safer to patronize brokers who are licensed by your national regulatory body, as your local regulator can hold them accountable and it will be easier to get your money back if the broker becomes absent.

You could lose all your funds if you frequent unregulated brokers.

  1. Not holding your broker responsible

Even though a broker may be licensed, he can always choose to sever the fiduciary relationship with his client.

If your broker feels you’re not asking the right questions, they might choose to be sleazy.

For example, if you are trading CFDs, where almost 70-85% of retail traders lose, but this is legal in many countries; your CFD broker may act as a counterparty to your trades. This means that they would make a profit when you lose.

Remember that every time you open a trading position, you must close it by making an opposite trade. Your broker could choose to be on the opposite side and profit from your loss.

Some brokers also chase stop loss orders, temporarily driving an asset’s price up or down to trigger a stop loss order.

You should ask your broker if he is a market maker. Also, regularly check your account statements to make sure everything is in order and that the broker isn’t cheating on you.

  1. Not managing your risk

Online trading comes with its own risks, especially when trading in the forex market where prices are constantly changing. However, whatever market you are trading in, whether it is currencies, stocks, commodities, etc., you can manage your risk if you understand the risks involved.

One of the main risks is margin trading. Using margin in your trading to magnify gains can also magnify losses. Most retail traders use money on margin, which can magnify losses.

The risk associated with leverage has even led major regulators like ASIC to intervene on the leverage that can be offered to relationship traders by a regulated broker for high risk instruments such as CFDs.

Also, not having an appropriate reward ratio for risk would make traders lose big. But there are ways to manage your risk, such as using a stop loss order.

A stop loss order sets a stop price, so once the asset price crosses that price, the trader’s position is automatically closed by triggering a market order at the next available price. By doing this, a trader can sleep peacefully knowing that even if the market moves against him, he cannot lose all his capital.

  1. be too emotional

Winning and losing are outcomes that every trader will face whether they like it or not. The problem is that human beings don’t like to lose.

Studies have shown that we mourn the loss of an amount of money more than we celebrate the gain of the same amount of money.

A trader must prepare their mind, trade only with the amount of money they are comfortable losing, and be disciplined enough to take profits when they occur and accept losses when they occur.

Some traders enter the middle of a trading position out of revenge trying to cover previous losses, but end up digging a bigger hole for themselves.

The mindset of a trader entering a trading position should be that if he loses a certain amount of money in a trade, he will stop and wait until the next day.

He should set a goal for the amount of loss he is willing to accept that day. Once this point is reached, he must self-regulate, shut down his system and stop trading.

  1. Falling for online investment scams

A plethora of scams exist online and even experienced traders have been caught off guard.

These scams usually emanate from social media with people claiming to be investment experts and forex gurus who have an impressive following base on social media. They promise unrealistic returns on investment of up to 200% and never talk about the risk involved as required by all regulators.

For example, the most common investment scams in the UK according to the FCA are related to forex, binary options and pyramid schemes.

Take the example of a forex scam. In this case, the scammer might offer you to manage your trading account if you give him the password or he might ask you to send the money to his own trading account to trade and share the profits with you. Once you part with the money, they may pay your returns initially to encourage you to invest more money.

They normally operate a pyramid scheme where the person on top brings two people below them and the two people recruit three people to be below them and so on. The scammer could deploy an unlicensed forex app on the Appstore and the victims download and open accounts and the initial victims recruit new victims to download the same app so that the pyramid continues to grow. In the end, the funds from all victims’ trading accounts are transferred to the crooks’ account and the victims find out that the app they downloaded was a fake app more like a video game with fake numbers.

These pyramid schemes are never regulated by any regulatory body, but unfortunately people continue to frequent them hoping to get lucky and make some money before the bubble bursts.

  1. Bad cybersecurity

Merchants should always use strong passwords which should be alphanumeric and contain special characters and passwords should be changed regularly.

Many scammers run advanced scripts to guess passwords and if they gain unauthorized access to your trading account, they immediately associate a new account with it, sell all the shares you have in the account and fire the money to bank accounts controlled by hackers.

Traders should also enable two-factor authentication (2FA) on their trading apps. With 2FA, even after entering your password, the system still sends a code to your mobile phone that must be entered to complete a transaction.

Use website addresses that start with https instead of http or have a padlock in the web address window. Https stands for “Secure Hypertext Transfer Protocol” and information sent through secure browsers will be encrypted.

Merchants should also avoid using public Wi-Fi networks, whether in parks, hotels, train stations or airports, as they are insecure and passwords can be stolen.

Antivirus and antimalware software are not optional and should be installed and updated regularly on each trading device. We might be downloading malware unknowingly and anti-virus software helps to detect malware installation.

When installing an app, it may ask for permission to access parts of your phone such as contacts, camera, etc. Think twice before granting access because an app shouldn’t have to request access to areas of your phone unrelated to its core functions.

  1. Have no plan

Before you jump straight into trading, you need to take note of every little detail.

Determine your entry and exit points, determine the stocks you wish to trade, and determine the amount you wish to trade with.

Also, don’t get hung up on losing trades because when the market moves against you, it could get worse before it gets better and you could see all your capital wiped out in seconds.

Also, it is important to understand that online trading is very risky and you could lose all your capital.