Table of contents:
- 1 1. Be aware of the risk in trading
- 2 2. Debts through trading are possible
- 3 3. know the players in trading
- 4 4. avoid fraud by trading brokers
- 5 5. protect yourself from dubious trading coaches
- 6 6. big dangers in small time units – day trading
- 7 7. know the fees in trading
- 8 8. Never hope – Machinery Trading
How dangerous is trading? What are the risks? – On this page, I share with you my valuable experience on the subject of trading and fraud or dangerousness. I have been active in the financial markets for more than 7 years and have experienced low blows as well as high points. In the following points, I will explain the topic “trading” to you step by step. Is it really worth dealing with it? What are the chances of winning? – These questions and many other topics will be discussed by me.
1. Be aware of the risk in trading
Stock exchange trading is risky. You cannot earn money on the stock exchange without taking a risk. In trading, you buy value on the financial markets and try to sell this value with a profit. The market is always looking for a fair price according to supply and demand. The number of orders and the trading volume of the participants determine the price.
As a private trader, you are now trying to predict the future or make an investment, for example, because you are convinced of a company, commodity, or other asset class. The price fluctuates daily and can also lose value. As a trader, you take the risk that the price could go against you. The invested capital can be lost and, in the worst case, debt can be built up (more on this in the next point).
In summary, with this first point, I would just like to say that you should be aware of the risk that you can also suffer losses. There are winners and losers on the stock market. However, there are risk management tools to our advantage. For example, the Stop Loss limits your loss. It can be set for every order.
Invest only the capital that you can lose in the worst caseAndre Witzel (Author)
2. Debts through trading are possible
With certain financial products, it is possible to incur debts. These include futures, shares (short sales), or other derivatives. A well-known example is the negative oil price from 2020. Traders bought futures at a very low oil price and the price then went into negative territory. This resulted in heavy losses because the trader could not close the position because the broker could not give execution. (Report of $104 million loss for Interactive Brokers)
The traders were very lucky that the broker covers the losses. But this is not always the case. It is possible to get into debt with derivatives and turn the account balance into a negative balance. This happens in extreme market situations. An example of this can be closed markets. The markets then open at different prices and the current trading position is extremely negative. This results in gaps in the market.
The following applies: For trading, 2 players must always be active – a buyer and a seller. If one side is missing, the trader’s order cannot be executed. To your advantage, however, the obligation to make additional payments for the popular products Forex and CFD has been abolished by corresponding regulations. In addition, brokers have various security mechanisms that automatically close your positions and protect you from debt. Only in very extreme situations and if you are not careful, you can get into debt with specific financial products.
3. know the players in trading
You are not the only player in trading. There are many different players on the markets. Do not forget that you are trading with professionals in a market. There is no beginner’s or professional market. There is only one market for all participants. Professionals have no consideration for the beginner. The stronger and better trader wins. All others make losses.
From these facts there are also tips for trading strategies (more about this later). It is best to create an environment where it is the easiest to trade.
The following players are active in trading:
- Private traders
- Professional traders (traders who trade debt capital)
- State institutes
- Equity funds
What I just wanted to say with this 3rd point is that each of these actors wants to make money. They have to train themselves quite well and have the necessary or right knowledge to survive in the markets. A blind investment will backfire in most cases and is a meal ticket for the sharks.
4. avoid fraud by trading brokers
There are also fraudsters in the trading area. One of the most common rip-offs are dubious trading brokers. These companies are mostly unregulated and have no official company address or only a mailbox abroad. You should protect yourself from fraudulent online brokers. Before you register, you must check the broker.
Most important is an official regulation by a financial supervisory authority. With regulated brokers, you can rule out fraud on the customer. Check the website carefully and also the company data. Sometimes it even happens that they are faked. I recommend using already known online brokers. These are usually even regulated several times. Beware of smaller, unregulated, and unknown providers.
In the following points I would like to give you some information and questions you should pay attention to before registration:
- Is the broker regulated?
- Where is the broker registered?
- Is there good customer support?
- What are the trading conditions?
- Are there any hidden costs?
Recommendation for a secure and serious broker: Plus500
The team of Finanzanalyst.de and I recommend the CFD provider Plus500 on this website. There you can trade over 2,000 different markets (commodities, stocks, indices, cryptocurrencies) at low fees. This broker also has a very user-friendly trading platform that is easy to use and allows you to perform professional analysis.
The company is subject to multiple regulations and is considered very safe. Plus500 Ltd. is even listed on the London Stock Exchange as a share (Plus). Several million customers already use this broker. We can recommend it because it offers a very good overall package for any trader.
Advantages of Plus500:
- Multiple regulated company
- Active on the market since 2008
- Plus500 Ltd. is listed on the London Stock Exchange
- Free practice account (demo) and a small minimum deposit of 100€
- Over 2,000 markets at reasonable fees
- User-friendly trading platform
- Fast deposits and withdrawals
- Support 24/7 in different languages
5. protect yourself from dubious trading coaches
Another problem that makes trading dangerous is dubious trading coaches. There are a lot of them, a dime a dozen. Stay away from intrusive advertising. A trading coach, who has to place advertisements to generate customers, certainly does not earn money with trading. In fact, he spends money making money on coaching.
From my experience, I can, unfortunately, say that 95% of trading coaches sell useless information. I have already lost a lot of money through this. There are even traders who have lost more than 6-digit amounts of money through dubious coaches and advice. Before you buy or book coaching you should demand real results and evidence. This way you can filter out 90% of the coaches because they don’t publish any results (because they have none except losses). On the internet or on YouTube there is already a lot of free and good information that will help you in trading.
6. big dangers in small time units – day trading
Short term day trading is the most difficult trading method. A daytrader often trades very small movements in the market or is only a few minutes in a trade. The game can be broken down to 1 – 2 points profit per trade. In day trading all positions are closed before the close of the market and there is a fixed working routine.
Day trading is not for beginners. You need an enormous amount of concentration and willpower. The dangers in day trading or small-time units are much greater than with long-term investments. The movements are very fast and you have to act and react in millisecond intervals. Few moments can decide on a profit or loss.
In addition, you compete against the strongest opponents in the market: Algorithms. A large part of the volume traded comes from algorithms that trade only a few points or perform arbitrage. A manual trader will never be faster than an algorithm. Even professional day traders look forward to beginners in the market. They like to fish the stops.
Personally I can only advise against day trading as a beginner:
- You fight against algorithms
- Algorithms and professionals trade against beginners
- You need extreme attention
- A few seconds decide on profit/loss
- Great danger through extreme volatility
- Hardly manage without professional training
7. know the fees in trading
Other dangers lurk in trading if you do not know the trading fees. There are different costs for the trader, which I will explain in this section. The costs depend on the online broker. In summary, however, one can say that the fees have fallen enormously in recent years due to the increasing competitive pressure.
In general, there are trading fees and additional fees. With Forex & CFD trading fees there is a spread, commission, or swap. The spread is the difference between the buy and sells price. Many providers add an additional trading spread to the current price to make money. Commissions are also often charged on certain trading products. This is a fixed amount per trade and depends on volume. Depending on the financial product, there is also a swap (financing fee). In the case of leveraged products, this is incurred because the position must be financed.
There are the following trading fees (depending on the broker):
Additional fees are charged for account management, withdrawals or inactivity. Often the provider waives these fees. It is essential that you inform yourself about these additional fees before opening an account:
- Fees for stock exchange data
- Trading platform fees
- Costs for deposits and withdrawals
- Inactivity fee
8. Never hope – Machinery Trading
Emotions are out of place in trading! In this last point I would like to give you an effective trading tip and point out the dangers of emotions. Trading with real money on the stock exchange is not easy. Beginners or even experienced traders are tempted to gamble. It often happens that a trader wants to make up the loss he made and then makes even more losses afterwards.
You must switch off your emotions and stick to a strict plan. Never hope! Do not get into a position. Expectations of trade are also counterproductive. Trade must be done like a machine. It is necessary to have a plan for trading entries and exits. Without a suitable strategy, trading on the stock exchange is too risky. You need to know what you are actually doing.
The following questions will help you with an emotionless trade:
- What are the criteria for entering a trade?
- Where is the exit of my trade?
- Where is the loss limit?
- How much money am I risking?
- How do I behave in a market situation X
- When do I take profits?
I recommend that you secure your winnings as soon as possible. A big mistake of mine was not realizing profits. A tight stop loss has helped me maximize my profits. Act like a machine! There must be fixed rules for trading.
Conclusion: The risk is determined by each trader himself
On this page I have shown you how dangerous trading is and how to protect yourself from losses and fraud. Finally, trading is always dangerous, but the trader determines the risk himself. Therefore there are loss limits and risk management. You have to decide on the amount of investment yourself. For example, you can open a position with a few cents or with several thousand euros.
The risk is determined by the trader. In summary, you need to inform yourself enough about the markets, financial products, charts, and brokers before trading. I recommend using a free demo account first. In the end, it always depends on your own trading style and willingness to invest money. Never invest more money than you can lose. With sensible risk management, you are then also on the safe side.