Social trading is inherently risky, as everybody knows. When you make an investment, whether that is because you are following a trader or building up your own career, you must always be aware that its value could fall at any moment. However, this is not the end of the world.
If you're not used to seeing the value of your investment drop, then it can be incredibly nerve-wracking. It's very easy to worry too much and make a poor financial decision based on the fear of making a huge loss. However, this does not have to be the way. A fall in the value of your trade is rarely as bad as it seems, and can even be a good thing.
So, what can you do if the value of your trade begins to fall? Here are our top tips for dealing with this common social trading issue:
The first thing to remember is that it is not the end of the world if your trade loses a bit of value, so don't treat it as such. Of course nobody likes to lose any money, but in the grand scheme of things a small loss won't affect you that badly. However, a bad decision made while panicking could have plenty of negative consequences for you.
If you recognise that you're worrying excessively about the effects of your trade, it might be a good idea to take a step away and do something else for a while. Spend about an hour away from trading, if you can manage it. This is just to clear your head and enable you to think properly about what your next move will be.
You definitely don't need to panic and get rid of the trade as soon as its value begins to fall. This is a normal reaction for many people, but in a lot of cases it is simply not needed. A single trade is rarely enough to ruin your career and sometimes the value will shoot up again if you are patient.
Manage your risk
The main reason for not panicking is that, if you are sensible, you will have already determined a maximum loss level. This is a simple tool offered as part of ayondo's Loss Protection service that you should make use of whether you are following a trader or becoming one yourself.
Essentially, this sets a limit on how much you are prepared to lose in a trade, expressed as a percentage of your total account. So if you set your maximum loss level at one per cent for an account of £10,000, then you will never lose more than £100 if the value of a trade starts to drop.
This gives you the luxury of patience. It doesn't matter too much if a trade's value begins to fall, as you know that you will only lose a certain amount in the worst-case scenario. This means you can wait for the trade's price to rise again, which it might do.
Prepare yourself for fluctuations
Perhaps the most important thing to remember is that markets rarely rise continuously in the long term. They are always going to fluctuate a certain amount, which means the value of your trades is likely to drop at some point.
The correct plan of action if this happens is to study the market and try to understand why the value dropped, and if it is likely to rise again any time soon. Often, it is a good idea to keep hold of a trade in preparation for when it becomes worth more in the future, rather than panicking and getting rid of it as soon as possible.