Trading frequently is a widely discussed topic among investors and traders, however, with many differing opinions. While some believe that it holds the key to consistent profit, others consider it an unproven technique that can lead to significant losses and gains.
The truth lies somewhere in the middle. By following a few simple tips, you will successfully trade more frequently than before without sacrificing any of your profit potentials.
Manage your risks
Risk management should always come first when trying to increase the number of trades that you make. No matter how tempting it may be, never trade with money you cannot afford to lose. If your account size changes every time you place a trade, then there is no way for sustained growth and profits (or losses). Trading often also means increasing the number of commissions paid – which eats away at profits even more if not adequately accounted for.
Once you find an acceptable level of risk, then you can begin to think about trading frequency. Higher frequencies mean more trades, but it also means taking smaller profits and giving up more potential trades to wait for stop-losses to trigger (which may make it advisable to look at different types of orders).
There are several risks involved when trading frequently. These include margin call risk, stop loss risk, counterparty risk, liquidity risk and settlement risk. Before deciding on how frequently you should make your trades, you must first understand these risks and take steps to minimize them for your trades and your overall portfolio. Your broker should provide sufficient information on how to do this.
Margin call risk
The possibility of being liquidated due to a drop in the value of the assets under management is ever-present. One way to reduce this is by carefully considering stop loss point, or even better, using stop-loss limits, where one cancels out the other, so there is no margin call. This can also happen if you are trading futures contracts that are margined daily, so it’s essential to find a broker who supports good return on margin policies.
Stop-loss risk
They are also known as “loss risk”. It is the possibility that one’s position will be closed due to a lack of sufficient funds. The lower your stop loss, the higher this risk. However, many trading strategies can mitigate or even eliminate this risk, such as: scaling into positions, trailing stops and pre-defined price targets ( take profit and stop loss ). Your broker should well document these techniques.
Counterparty risk
The chance that any given counterparty in a financial transaction will fail to meet its obligation. It can be difficult for smaller traders to reduce counterparty risks as they usually come with larger counterparties such as banks (or other large companies). However, you should always use “bilateral” contracts where possible and ensure that both parties have an equal level of responsibility.
Liquidity risk
This refers to the chance that one cannot sell or buy in a financial market without affecting its price unduly. The higher the liquidity, the lower this risk. Liquidity risk varies between different assets, so you should always check before executing any transactions. Liquidity can be reduced when making frequent small trades or using stop-loss orders which are not large enough to meet market demands for that asset.
Settlement risk
These could lead to losses if, for example, your position is carried over into the next trading day(s), but you have insufficient funds because it didn’t settle in time. It usually only occurs with futures contracts where positions must be “closed out” daily at an agreed price. Of course, the higher the volatility of an asset, the more frequently this is likely to happen.
Final word
While trading too infrequently could reduce your returns relatively quickly, trading too frequently carries its own unique set of risks which may also reduce your returns or even lead to more significant losses over time. For more on reputable online brokers, visit https://www.home.Saxo/en-sg/products/CFDs.
