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How to Protect Yourself While Trading


Gary Stevens — Last Updated on May 3, 2021

Secure Encryption iconTrading on the stock market is a great way to make a little extra cash or set yourself up for retirement, depending on your skill and a bit of luck, that is.

But just as it’s important to learn how to win big on the stock market and make consistently solid trades, you should also know how to protect yourself while trading to avoid losing the cash you do make over time.

Today, let’s break down the best tips and strategies you can employ to protect your portfolio from catastrophe.

Inherent Risk – How Much Can You Avoid?


The overall truth about the stock market is that you can’t avoid some systemic risk. Trading on the stock market always involves betting on what companies will succeed and what companies will not.

Smart or successful traders get more of their wagers right and less successful traders can end up losing big time.

Does this mean the stock market is just another way to gamble away your life’s savings? Not at all. Unlike actual gambling, putting money on the stock market involves a lot more strategy and “calculated” risk. But there’s no way to avoid all the risk, no matter how ironclad a particular trade seems to be.

With this in mind, remember that protecting yourself while trading only goes so far. In fact, losing a bit of money here and there is part of the game – the object is to win more than you lose.

If you don’t have the stomach to handle at least a moderate amount of risk, funding your 401(k) and otherwise avoiding the stock market might be a better idea.

Now let’s break down the best ways to protect yourself (and your portfolio) while trading. The first collection of tips will be physical or practical protection strategies, while the second collection will focus on trading strategies.

Use a Good Stock Trading App or Platform


trading app icon

Possibly the most important thing you can do to protect yourself while trading is to use a solid stock trading app or desktop platform. There are a few big reasons for this.

For starters, stock trading apps allow you to trade different types of assets on the stock market. This, in turn, may limit you to only buying or selling riskier or safer assets.

For instance, it’s often safer to buy regular stocks than it is to buy binary options, which are more complex stock market objects only recommended for more advanced traders.

Your choice of the trading app will also determine how much money you have to put into your account to open it, and how much money you need to maintain over the long-term. Some stock trading apps are more suitable for beginners, while others are better for big-time traders that have hundreds of thousands of dollars floating around the market at any one time.

Furthermore, your platform will determine the educational materials available to you. This is a particularly important thing to consider if you are a beginner to the stock market. Some platforms even come with tutorials to walk you through your first few trades.

Invaluable Data

Even better, the best stock trading apps and platforms will come with market analysis data packages you can either purchase or get as a part of your subscription. All this data is invaluable as you do market research and determine which assets will be good parts of your portfolio and which assets you should leave behind.

All in all, it’s a good idea to think of your stock trading platform or app as your main toolkit for trading on the stock market. If you have a great app, you’ll likely do better than if you muddled along with a subpar platform.

One last thing – some stock trading apps have better website/app security than others. While getting hacked isn’t a huge concern for most stock market traders, it is something to consider as cybercrimes become more common in our increasingly-digital world.

Don’t Give Your Trading Information Out


This is mostly related to your stock trading app or platform, but it’s also important so that you don’t get penalized by the SEC, which watches over trading activities to ensure that no insider trading ever occurs.

In short: don’t talk about your trades or trading information in public! In fact, try not to talk too much about the details of your trades with anybody.

The reason to avoid doing this is to:

Prevent Anyone From Accessing Your Stock Apps or Accounts

If someone gets ahold of your stock trading app and places some trades you would never think to do personally, you won’t be able to make your case to the SEC. In their eyes, any trades placed on your account are legitimate.

Avoid Accidentally Participating in Insider Trading

This is really only relevant if you buy or sell stocks or other assets that are related to a company you have a vested, personal interest in (i.e. if you trade the stocks of the company you are employed by). Still, it’s best to err on the side of caution and not even get put on the SEC’s radar.

Giving away your stock trading account info is very foolish for the same reason it’s foolish to give out your bank account info. Keep all that stuff under lock and key and make sure that your password isn’t easily guessable by someone trying to get into your accounts.

Choose Your Stocks Carefully and with a Lot of Research


stock market upwards arrow iconNow let’s get into strategies you can employ once you’re actually investing in the stock market.

The first great way to protect yourself while trading involves doing a lot of personal research. Contrary to what many clickbait articles will tell you, trading isn’t incredibly easy (nor is it particularly hard, but still).

You can’t just trade the four-letter combinations that appear “green” on your stock trading app and avoid ones that go “red”.

Instead, you should get comfortable with the practice of thoroughly investigating any stock, asset, or anything else you want to trade on the stock market before actually going through with the trade. There are a few big reasons for this.

  • ☑️ One: it allows you to determine whether the stock or asset in question will be a good fit for a diverse portfolio
  • ☑️ Two: it gives you an opportunity to look into the future and ask yourself where you hope to be long-term
  • ☑️ Three: it allows you to investigate what other people are doing with that stock. This is particularly helpful if you’re just starting out

It often helps to rethink your relationship to stocks or other assets before you trade them. Instead of looking at a stock, option, or anything else as a monetary wager, look at is as you investing in the company or product behind it.

If you buy a stock, after all, you’re technically invested in the company to some small degree (or a large degree, if you buy a ton of stocks for a given organization). Look at yourself as an investor and odds are, you’ll make smarter trades and only go for deals that you can believe in financially, morally, or otherwise. 

As an added bonus, this is also one of the best ways to find meaning and fulfillment as a stock trader. In this way, you’re an investor instead of just another person trying to make money off the stock market.

Don’t Commit All Your Cash to a Single Deal


Avoid the temptation to treat the stock market like a high-stakes poker game and don’t put all your chips into a single hand. For instance, maybe you do some research and find that a particularly great stock deal is coming up soon. Perhaps a company’s shares are super low by you believe that they’re about to skyrocket in price.

As tempting as it might be, do not commit all of your cash to a single trade. This could work out immeasurably well, but it could also end up tanking your portfolio and removing your ability to invest in the stock market for some time to come. 

This is true even if you have plenty of experience under your belt. In fact, experienced stock traders would be the first to tell you that putting all your proverbial eggs into a single basket is foolhardy at best. Instead, remember to keep a diverse portfolio and buy shares with set amounts of cash.

This has a side effect of making you a little less emotional whenever you buy or sell. More often than not, this is one of the better trading strategies.

Don’t Panic Buy or Sell! Avoid Listening to Market Noise


meditation iconSimilarly, avoid emotional buying or selling in response to news events or other ambient “market noise”. Market noise, in this sense, could be any kind of communication or general hubbub you hear about asset movements or price changes.

Avoid thinking like another part of the crowd. Think for yourself.

While looking at the news and keeping abreast of events that could affect your portfolio and future buying decisions is important, don’t have a knee-jerk reaction and, for instance, sell all of the shares for your favorite company just because they have a bad quarter.

Similarly, don’t necessarily jump on the bandwagon when a news article comes out about an awesome startup tech company that might have the cure for cancer. Do a lot of research and make measured, critical purchases or sales depending on what you learn and what works best for your long-term investment goals.

The truth is, most people are average at trading on the stock market, just as most people are average at everything in the world. Just because most people are buying or selling a particular asset doesn’t mean that it’s a necessarily smart idea, even though it may seem so because of peer pressure.

Diversify Your Portfolio


We mentioned this a little earlier, but in a nutshell, a diverse portfolio is one with a variety of stocks, options, and other assets under its umbrella. It’s not a portfolio only made up of real estate investments, staple crop stocks, tech options, etc.

Holding a diverse portfolio is a great way to protect yourself while trading because:

  • ☑️ it insulates you if one or more key stocks or asset start to fall in price
  • ☑️ it protects in the event of an entire industry going under
  • ☑️ it protects you from stock overvaluation

For instance, say that you had all of your stocks in real estate companies and similar ventures. This sounds like a solid strategy, right? After all, isn’t real estate the best investment market to get into for its stability?

As 2008 showed us, this is not always the truth. Those who had their portfolio dedicated to real estate investment saw sharp losses as the housing bubble popped. If they’d had a diverse portfolio, they would’ve lost, yes… but not everything. In a nutshell, a diverse portfolio allows you to survive hurdles that more specialized investors often stumble on. 

This is particularly important when it comes to stocks. United States stocks are extremely valuable these days, so everyone tries to get a piece of the S&P 500 (a collection of the most valuable publicly traded companies in the economy at this moment).

But perhaps because US stocks are so valued, they’re also a little bit overvalued, as any experienced stock market risk analyst will tell you.

US stocks are performing well right now, but what comes up must come down. This doesn’t necessarily mean a big recession or depression is on the way, but it does mean that your stock portfolio should be more diverse if you only have US assets at this time.

Look into foreign stocks if you can. These are starting to tick up significantly, particularly in developing countries and in Europe.

Use Non-Correlating Assets


This strategy is related to holding a diverse portfolio in general. “Non-correlating” assets are simply bonds, currencies, commodities, stocks, and everything else that are not related to one another. Basically, it means you should have multiple types of assets in your portfolio instead of just a bunch of diverse stocks.

This is because different assets on the stock market react differently to market change. For instance, stocks across the market could fall over a short timeframe, but bonds or other assets might go up.

If you have a portfolio diversified both in the types of things you invest in and the assets you hold, you’ll be insulated from practically any type of market failure short of a full-on depression like we saw in 1929.

This does mean that a portfolio with non-correlating assets won’t necessarily have as many gains as a fully specialized portfolio riding a special wave of certain successful stocks, options, or the like. In this way, a more balanced portfolio forgoes the super high wins in favor of protection from really bad losses.

Buy Put Options for Winning Stocks


money icon

Conventional (and time-tested) wisdom says that you should usually hold onto stocks that are doing well. In general, and even when accounting for historical dips like the Great Depression or Recession, the stock market goes up and stocks increase in value.

But you might want to lock in some gains without getting rid of all your winning stocks fully. This way, you can lock in your profits without eliminating the opportunity for greater profits in the future. What do you do?

Buy put options. In brief, these are trades where you bet that the stock attached to the option will decrease in price will become less valuable. When you buy a put option, you can sell at that price later down the road.

Here’s an example:

  • ☑️ You own 50 shares for A Company. It trades at $100
  • ☑️ You believe that the value of these stocks will decrease shortly before generally rising over the long-term
  • ☑️ You buy a put option for A Company for six months in the future. The strike price for this option is $105
  • ☑️ Meanwhile, it costs $5 per share to buy the same option 
  • ☑️ This entire set up means you are able to sell 50 shares for A Company at $105 a share before the option expires
  • ☑️ If, for example, the price for A Company’s stocks go down to $90, you can sell the option and make a profit to offset your losses from the lower stock price

Put options are great ways to shore up your investments and cushion yourself as eventual but temporary decreases in stock value roll around from time to time. The strategy is a little more complex than this basic overview, and there’s a lot to knowing what a good put option looks like, but that’s the gist.

Use Stop-Loss Orders Religiously


If you have a good stock trading app or platform, you should become familiar with its stop-loss order functionality.

A stop-loss order is an automated command that tells your portfolio (or whoever is running it) to sell a particular share or another asset in the event that it reaches a certain low price. It’s essentially in order to cut your losses and escape with as little loss as possible.

There are two main types of stop-loss orders: hard stops and trailing stops. Hard stops are the easiest to understand. Set a hard stop for, say, $10 and the automated command will sell the attached shares if they ever drop to that value. This prevents you from taking more of a loss if the shares continue to drop in price.

A trailing stock moves with the stock price and is based on percentages. You can, for instance, set a trailing stop for 10%. This allows you to sell based on relative value and adjust more agilely with the market. Either way can work, but everyone should utilize these orders to protect their portfolios from losses you can’t recover from.

Utilize Principal-Protected Notes


trading and investment iconThis little-known strategy is perfect for those who want to keep their principal investment costs intact as they trade.

Principal protected notes are very similar to bonds in that they are securities objects that return your principal investment to your account if you hold the principal-protected notes until they mature.

You can use principal-protected notes with “equity participation” rights as well. You can purchase these notes with certain participation rates, which entitle you to some share of the profits upon securities maturity.

For instance, if you have a principal-protected note with an equity participation rate of 90%, you’ll get your original investment plus 90% of the profits made over the trade term.

Therefore, these are excellent purchases if you are a risk-averse trader and want to protect yourself in a fickle or uncertain market environment.

Invest in Dividend-Paying Stocks


One last way to protect yourself while trading is investing in dividend-paying stocks. This isn’t necessarily because of the stocks themselves, but because such objects are usually only offered by stable, profitable companies. It’s a little circular, but essentially:

  • ☑️ Companies that do well offer dividend-paying stocks…
  • ☑️ Companies that pay out dividends get more investment and do better…
  • ☑️ So they offer more dividend-paying stocks and everyone makes more money.

Essentially, these stocks can increase your overall return on investment. You get not only the value from the stocks as the attached company becomes more valuable, but you also get the dividends from those stocks (which can be distributed quarterly or yearly).

In another way, this connects you to a company’s success in a way that few other stock market assets can. Making more money protects you while trading since you have more cash to fall back on during hard times.

In Conclusion


In the end, learning how to buy and sell on the stock market capably, and figuring out the optimal portfolio building strategies for your investment goals, is a long-term effort. You won’t ever be perfectly safe on the stock market, but you’ll eventually become safer and see better returns on your investments the more you practice.

Follow the above tips to protect yourself during the beginning of your stock market journey and you’ll be more likely to see great success!

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