Why would anyone choose to trade a high-risk investment? For the potential reward, of course.
The profit traders make from securities usually depends on their risk profile. Higher risk often means higher potential returns. For example, bonds are considered low-risk but offer low returns. On the other hand, stocks, cryptocurrencies, and forex trading tend to be more volatile, so they can deliver huge profits in a short time. Some investors thrive on this uncertainty, while others prefer safer, more predictable returns.
But is chasing high-reward investments really worth the risk? In this article, we’ll explore the pros and cons of high-risk online investments, who they are best suited for, and what factors to consider before taking the plunge.
High-Risk, High-Reward Investments
A high-risk investment is one in which the chances of liquidation are higher than the average in that industry. In the financial markets, for instance, high-risk investments describe those in which market conditions can reverse, leading to higher losses when proper risk management techniques are not implemented. For traders, risk could also refer to the amount (lot) they use for trade and their strategies to maximize profits.
Many trading platforms, such as the MT4 trading platform, allow traders to define tolerable risk-to-reward levels and manage their trades using automated orders, such as take profit (TP) and stop loss (SL). Although all investments have inherent risks, investors often use high-risk and low-risk assets to create balanced portfolios.
The potential for significantly higher returns makes high-risk investments attractive to investors. They are best suited to investors with a higher risk tolerance and those with deep capital to hold through market fluctuations.
Factors Influencing Investment Risk
In every market, different factors influence investment risks. These include:
- Political Stability: Geopolitical conditions influence markets and can shift the risk momentum. Escalating tensions between major economic powers may increase or decrease the volatilities of various assets.
- Asset/Market Performance: The historical performance of an asset may indicate future performance and influence risk exposure. Investors study previous data to find repeatable patterns and identify potentially profitable points and their risk tolerance.
- Regulations/Restrictions: Regulatory changes and technological advancements impact market risks. In previous years, for instance, automation with AI has grown and is disrupting markets, leading to uncertainty for many investors.
- Economic Policies: Trade tariffs, spending cuts, interest rates, and other financial policies can significantly influence markets. These can affect the risk level of any investment. For example, holding the US dollar as the interest rates increase can yield profits, but sudden cuts may heighten risk.
If you are considering an investment, you can quickly identify whether or not it is high-risk when you can determine the factors influencing the market, your risk tolerance, and potential returns.
How To Manage High-Risk, High-Reward Investments
Maximizing profits in a high-risk market requires careful planning and adhering to your investment plans. This is how you can make the most of your investments.
Know the Market Cycles
Every market has four phases of market cycles: accumulation, mark-up, distribution, and downturn. These phases describe investors’ behavior and market reactions. In the accumulation phase, investors start buying more of the asset, resulting in a price increase in the mark-up phase. Afterward, the investors sell off to secure profits, decreasing prices in the downturn phase.
These cycles typically last six to 12 months and are fractal, meaning you can identify them on different timeframes on online platforms. Knowing the market phase helps you identify risk levels and move along with the institutional investors who control market movements.
Practice Trade Management
Good portfolio management is crucial to managing high-risk investments. Knowing when to leverage, increase or decrease trading positions, take partials, or close positions to minimize drawdowns is a skill you need as an investor. Hedging, automated orders, and futures trading are other strategies.
Play the Long-term Game
Warren Buffet, one of the greatest investors ever, said, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes.
” This sums up the idea of playing the long-term game in any market you invest in. Although short-term investments, scalping, day trading, etc., are great, holding out for high-risk trades usually yields the desired results. You should carefully analyze the asset/market and decide whether or not it can hold investors’ interests for long.
Consult Professional Managers
You may not need a professional manager if you have the skills to research fundamental data, analyze price charts, and invest in markets. However, beginner traders and investors should consider consulting one. Professional managers who focus on high-risk, high-return investments can help you get started with the market.
Avoid Impulsive Decisions
Successful investors avoid impulsive and emotional decisions when trading. Detachment from investment outcomes and allowing traders to run through is best for high-risk investments. Impulsive investors can close positions before they reach profits or hold out, hoping for more profits until the market reverses into a drawdown. Identify your entry and exit positions and allow the trades to play out.
Diversify and Leverage Market Trends
Diversifying your portfolio among different assets, industries, and markets is a smart way to manage high risks and ensure a higher chance of profits. Many investors diversify their portfolios using the 80/20 investment principle, a mix of equities, currencies, commodities, and crypto. You should also ride along market trends to increase returns. Market trends offer short, time-sensitive opportunities to make profits while keeping your main investment goals on track. For example, a bull run in the EV market may offer the chance to grow your portfolio by trading shares.
Verdict: High-Risk High, Reward Investments Are Worth It
The potential for higher returns makes high-risk investments worth it. However, it is essential to have a suitable strategy to navigate different market trends, diversify your portfolio, and keep your investments profitable.
Maintain a good risk management strategy and avoid emotional decisions when trading. Follow market news and important events that influence financial markets globally and locally.
