Getting Started with Online Trading: Matching Asset Selection to Your Risk Profile
July 6, 2021
Getting Started with Online Trading is not easy at all. After all, it involves undertaking an activity that requires a certain amount of skills and intellectual energy, which presents its own unforeseen challenges and requires the management of technical, emotional, and operational factors.
One of the aspects that those who want to start with Online Trading should manage with the utmost attention is the relationship between the investment approach and one's own risk profile.
It's not a trivial matter: in fact, there is often a tendency to put one's own specificity in the background to follow the call of the perfect trading strategy.
It's worth talking about, then. That is, taking stock of the impact that one's risk profile has on trading activity and in particular on the choice of assets.
The importance of respecting your own risk profile
Each individual, when it comes to investing, has their own risk profile. It depends on one's personal attitudes, as courage or the tendency to be cautious are characteristics that vary from person to person.
Obviously, it also depends on one's economic availability, and on the ways in which this availability has been acquired. A trader will "consider" their capital differently, depending on whether they have earned it through hard work, acquired it through a donation or an inheritance, etc.
What happens when the approach to trading activity is not consistent with the risk profile? This is a far from rare occurrence, also because there is a tendency to consider what, looking around, seems to work best, without asking questions about the ability of the same approach to "fit" oneself.
The issue particularly concerns one of the first choices that those who want to start with online trading make: the assets to invest in.
The consequences are almost always negative. In the best case scenario, that is when the approach is much less risky than one's own attitudes, it results in a feeling of boredom and loss of motivation.
In the worst and unfortunately more frequent case, the approach is riskier than the beginner trader is able to manage. This is where negative and paralyzing feelings come in, such as fear. From here to the loss of clarity, it's a short step.
The correspondence between asset class and risk profile
Narrowing the field to the choice of assets, a question must be asked: is it possible to adapt the portfolio to one's risk profile? The answer is affirmative, within certain limits.
It is affirmative because there are more risky and less risky assets. However, it is not completely affirmative because speculative trading activity is basically risky. Therefore, the range in terms of risk is quite narrow.
In any case, it is possible to trace parameters capable of defining, with a certain degree of approximation, the "riskiness" of assets. These parameters are: the frequency and amplitude of oscillations; the readability. Incidentally, by readability we mean the presence and susceptibility to stable market movers, which can be taken as a reference point.
If we take these parameters as a given, among the riskiest assets, perhaps the riskiest of all, we find cryptocurrencies. They have no stable market movers, and they are also characterized by "extreme" volatility.
Among the riskiest, but still a step below, we find stocks. In fact, they are volatile but do not lack readability at all. After all, the presence of market movers is well established, and in general, the issuing companies are well integrated into their respective economic environments.
In an ambiguous position we find commodities. It's true, they are very volatile, almost on par with stocks, but in return they "shine" for readability. The link with the performance of the economic system, in fact, is really close, almost consequential.
Among the assets that present a certain degree of risk, but lower than those already mentioned, we find traditional currencies: euro, dollar, pound etc. They are quite readable, since they are an expression of their respective economic systems and also quite susceptible to monetary policies. They are less volatile than many other assets, also because they are regulated - directly or indirectly - by central banks.
It's a complex and too heterogeneous discourse, regarding the other asset classes, such as bonds and some derivative products.
Some advice to start on the right foot
In light of all this, how should those who want to start with Online Trading behave? It is possible to identify some tips that are not too difficult to follow, but very useful.
Know yourself from an operational point of view. Having a clear idea of your risk profile is a prerequisite for a consequential trading activity that fits like a glove (or as closely as possible). The advice, however, is to carry out a road test, to get to know yourself well. Until you face danger, it is difficult to understand your relationship with risk. To do this, to practice and test your reactions, one idea could be to subscribe to demo accounts, which limit concrete risks to zero but return a realistic feeling of the market.
Don't feel obliged to copy best practices. The desire to do well right from the start turns into frenzy. In turn, this translates into the tendency to imitate the approaches of others. As specified at the beginning of the article, it is not an approach that always pays off. On the contrary: it risks creating a discrepancy between one's own characteristics and trading activity. Therefore, aim to adapt trading strategies, rather than adopting them stringently.
Take into account the possibility of changing, at least in the initial stages. Not all donuts come out with a hole, especially when you prepare them for the first time. So, always with a view to adaptation, prepare to have to change assets and approaches in the initial stages. Don't see it as a defeat, but rather as a physiological mishap. The important thing is to understand when to change. Acting too soon means abandoning an approach that maybe just needs a running-in period. Acting too late means causing yourself too many economic losses.
