One of the big dangers about learning to trade is that you will naturally look to certain people to learn from. However, there are two types of teachers. The best teacher will show their students how to make their own decisions. The worst teachers will encourage their students to follow them blindly. The problem is that when a market moves quickly, like crypto markets have recently, those people can often get caught out. Here are the red flags to watch out for.
Outsized returns
Often the people who get the most attention are those who made outsized returns. The problem with this is that even an outsized return can be a red flag. Why? Because a very large return only comes from making a very large risk. The same risky behaviour that causes excessive gains can, you guessed it, cause excessive losses.
High leverage
There is a time to use leverage and the best traders know when to raise their risk. However, if people use or encourage the use of high leverage then beware that disaster may be coming
Life is uncertain
It’s true, but unsettling. There is some part of us that always wants certainty and we look to people to give us that certainty, even when we know it is elusive. The reality that we actually know is that life is full of uncertainty. The financial markets are exactly the same. Unexpected events can and do happen. So, there is never ever a ‘can’t lose’ trade or a 100% risk free investment. All investments have risk. All trades have risk. The real skill is managing rather than eliminating risk.
The summary
If you are looking for ways to navigate markets you need to find resources and people that will do these three things. Firstly, they must show you how to make your own trading decisions. Secondly, encourage you to use low levels of leverage and thirdly to be prepared for uncertain market reactions. Risk must always be defined and managed. There is no place for teaching people to put all their money into one trade or investment. In an uncertain world it just does not makes sense. Every day I run through aspects of these key principles on my daily webinars showing traders how to manage risk. See here for more details.
