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5 ways with likely outcomes

So what about the risk? Let’s talk that through. When most people think about risk, they think only about the downside risk, or “what could go wrong”. As a species, we are hard-wired to think harder about threats than opportunities, because back in the caveman days, a mistake over a threat meant immediate death, while a mistake over an opportunity might mean a little less food to share, but nothing too serious. So our brains are constructed to make us risk-averse, although this varies from person to person.

How does that affect our financial thinking, and the quality of our lives? For one thing, it means that many people don’t take advantage of opportunities that could change their lives, if those opportunities are tainted with a word that inspires fear, such as “risk”. Rather than balancing the opportunity upside and the risk downside, they are simply put off by the word “risk” and never look further.

Making your own decision

So if you were offered an investment opportunity with massive growth potential, and there was an associated risk of losing everything you put into it, how should you react? The key here is to make sure that you don’t invest into the “risky” venture anything more than you can actually afford to lose. If that is £500, fine, keep your investment to that. Now you have the promise of the money growing like crazy, and building up significant wealth over a few years. But even if the very worst happened, and the whole account was lost, in reality you have lost £500 that you put into it, plus a dream of being wealthy without effort, very soon.

What is the risk in forex investments?

The risk for most people venturing into forex is significant. It comes from the leverage, the expertise of the trader, and the risk reduction strategies they use. The first factor is leverage. When you trade the forex markets, it is common to use leverage of 1:100, 1:300, or even 1:500. What that means is that for every pound you put with a broker, and risk on a trade, you are multiplying both the upside and the downside potential by that ratio, such as 500:1. If you buy dollars with one pound, you are effectively buying £500 worth of dollars. If the exchange rate goes in your favour, for every $0.01 that the market moves, you gain $5.00. and if the market goes the other way, for every $0.01 that the market moves, you lose $5.00.

If you placed your entire capital on one trade, you would make the fastest gains and losses, and would risk losing the entire value of your account on one bad trade. This is the equivalent of going racing, and placing your entire betting bank on the first horse. If you win, you make money fast, but if you lose, you have lost everything you were prepared to put at risk. To avoid this, most traders recommend placing only 1-2% of the account at risk on a trade, or at the very most 5% of it. This means that if you lost your 5% stake on ten consecutive trades, you would still have half your money left. So leverage increases both upside and downside risk, but cautious trading (i.e. small trades, relative to the money you have) mitigates that risk.

The next factor is the expertise of the trader. Inexperienced traders tend to lose a lot of money, whether they do it on stocks or on forex. Experienced, successful traders win significantly more trades than they lose. They can analyse the market for situations where they are more likely to win; they select those opportunities. They make sensible decisions about when to get out of a trade, either because it has made enough profit, or because it is making losses that seem unlikely to be reversed in the near future. So by taking profits prudently, and cutting losses to small amounts, they make more profit than they lose, and consistently come out ahead.

You can open an account that automatically copies the trades of an experienced trader, risking small percentages of your money on each trade, taking profits regularly and limiting your losses. Then you will make money, fairly steadily, and reliably. You could still hit an occasional losing day or week, but on average you should do well. As trading depends on activity in the market, which is different every day, daily results will vary. The fact that there is a very slight possibility of losing the whole account should not put you off investing, any more than the fact that there is a slight possibility of being killed in a car crash should put you off ever travelling by car. You can also reduce your risk by putting some of your profits in a low-risk investment or bank account, while the other part of your money is “at risk” and growing fast.