It can be hard to quantify or accurately evaluate the value of the world’s financial markets, although the total value of assets under UK management totalled £9.1 trillion as recently as 2017.
While the numerous mechanisms of trading may vary across different markets and asset classes, there are a selection of universal rules that should be applied when building or managing any kind of portfolio.
So, let’s take a look at three of the golden rules of investment and why they’re so important from the perspective of traders.
- Understanding Risk and Evaluating Risk Tolerance
This is a key starting point for any investor, as it should inform every decision from the precise asset classes that you target and the amount of capital that you commit when opening each position.
In the case of forex trading, for example, you’ll also have the opportunity to utilize leverage as a way of opening and controlling positions that are far larger than your initial deposit.
In fact, most reputable brokers can offer leveraged products of up to 100:1, so understanding your own unique level of risk tolerance enables you to cap leverage at the right amount and maintain positions that are within your fiscal means and comfort zone.
You should also strive to understand the difference between risk and volatility, with the former inherent to every type of investment and the latter varying between speculative and fixed-income vehicles.
- The Importance of Determinism and Discipline
You’ll probably be awarded a free trading bonus when you open a new account as an investor, affording you some additional capital with which to execute your initial orders.
While this can encourage you to trade with real money from the outset, it makes sense to first utilize a demo account for a period of between three and six months and develop a viable trading strategy that can prosper in the corporeal marketplace.
This can also help to build a keen sense of determinism and discipline, which in turn enable you to understand the underlying rules that govern change in a particular market and adhere to your various strategies even during times of uncertainty.
Most importantly, this negates the omnipresent risk posed by emotive trading, which can undermine the best-laid investment plans and cause disproportionate losses over time.
- Finally… Invest in Something That You Understand
Last, but by no means least, we’d recommend that you actively invest in markets and asset classes that you fully understand.
The reason for this is simple; as it enables you to leverage knowledge to gain a critical advantage in a particular market while making it far easier to deploy your strategy and cope in a volatile and constantly shifting marketplace.
Ultimately, you don’t want to find yourself having to learn quickly on the job when trading with real money, as you may not be able to adequately absorb the losses that follow.
This is why leveraging expertise and using a demo account is so important, and these are definitely things that you should keep in mind as an aspiring investor!