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Is Trading Safe? (How to Trade Safely Explained)

Last Updated on 10 February, 2024 by Rejaul Karim

When potential traders are looking to enter the markets, ‘Is trading safe?’ is a question that is asked the most. This is because while humans crave reward, they fear losing much more. As such, new traders are naturally concerned with making sure they won’t lose their capital more than making a lot of money from trading.

Trading is quite safe provided that you utilize an edge and make sure you size your positions appropriately. This, along with you pursuing the right form of trading in a proper manner, is very likely to net you sizeable returns.

However, the risk is always there when you are trading, and there is always a chance that you lose capital. In almost all the cases, a long-term capital loss is due to a mistake made by the trader, and not due to the inherent risk of the markets.

In this article, we’re going to cover a lot of tips that will help you make trading safer! Let’s begin with the most important tiå!

What You Need to Know to Make Trading Safer!

If trading ever is going to be safe, you need to know your odds of success before you enter a trade. In other words, knowing what an edge is, is crucial if you want to trade safely!

Simply put, an edge is anything that allows you to have a consistent edge over other traders in the market. This means that as long as you have an edge, you are likely to make above-average returns in the markets.

For example, knowing that the market tends to go up after four consecutive down-days, is an edge that you could use to make money in the market.

Remember that an edge does not work 100% of the time. However, it does work most of the time, and most importantly, the net result is positive. As we will explore later on, finding an edge is quite difficult. Failing to find an edge is one of the reasons why most traders fail.

In fact, finding an edge has become increasingly harder in recent times! Why is that?

Why Edges are Becoming Harder to Find

Safe Trading- The Edge
Safe Trading- The Edge

In order for you to understand why finding an edge is more difficult nowadays than it was before, you first need to understand the Efficient Market Hypothesis.

In short, it states that the market is efficient and already has priced in everything there is to know. And the corollary becomes that trading is impossible, since the market is priced right all the time.

However, the efficient market hypothesis is mostly false. There is still an ample amount of money to be made in the markets today.

While the markets are not completely efficient, they are much more efficient today than they have ever been before.

This is because information about stocks, currencies, and commodities is available faster than ever nowadays. The advent of the internet has helped every single investor have access to information at the same speed as some of the biggest institutions.

On top of this, there is high-frequency trading. High-frequency trading firms have powerful computers and algorithms constantly analyzing the markets and looking to make money off of extremely short-term market movements. While high-frequency traders often make only a few cents on every trade, they are able to perform thousands of trades a day, reaping profits.

High-frequency trading, along with the information age, has made markets a lot more efficient. On top of that, they have also almost completely removed arbitrage opportunities from the markets.

However, as a retail trader you will not be affected by these types of trading activities, since you hold your trades much longer than the high-frequency firms. Even daytrading is a lot slower, and to a large extent not limited by the operations of the high-frequency trading firms!

If you are interested in learning more about high-frequency trading, take a look at this documentary:


How to Find an Edge

To find a market edge, you will have to carry out a lot of testing on historical data, with the help of backtesting. You want to find those edges that are hidden and not used by most people. This is because any edge that is available to the general public will be used by as many people as possible. Because of this, the market will adjust to the edge and it will most likely deteriorate!

If you’re interested in getting new edges delivered right to your inbox, why not check out our edge membership?

Remember that your edge won’t persist forever.  Edges come and go in the markets and will stop working eventually. You constantly have to develop new ones. There are no trading strategies that last forever, even if many trading gurus want to make you think so!

A perfect example of a trading edge would be Cornwall Capital Management, which turned $110,000 into $12 million by relying on the inefficiencies in risk valuation of extremely safe investments. Simply put, they looked for investments which had a huge upside potential with an extremely limited down-sided risk. The two traders of Cornwall, Jamie Mai and Charlie Ledley, were also featured in the hit film ‘The Big Short’, although the name of the fund was changed to ‘Brownfield Capital’.

The Trading Form That’s the Least Safe!

Least Safe Trading Form
Least Safe Trading Form

Daytrading indeed is what attracts the most attention from novice investors. However, it’s always been difficult, and nowadays, finding an edge in daytrading has become even more challenging.

This is due to the high levels of randomness that you’re subjected to with the lower timeframes, as well as the competition in the form of thousands of daytraders that are up to date with access to reliable information.

No matter how fast you are at recognizing trends and trading signals in the market, it is simply impossible to for a human to be as fast as a computer. A computer can detect trading signals within milliseconds, and capitalize on them to make instant profits.

Daytraders nowadays rely on another form of trading called Algorithmic trading. Let’s take a look at it in detail. After that, we will also discuss a couple of other forms of trading which can be useful for traders looking to ‘build’ an edge.

Trading Forms for the Safe Trader

There are many trading forms out there that should not be paid any attention of you’re new to trading. Here we have covered those trading forms that we believe are the safest, and where you have the highest odds of making money!

Still, trading never is idiot-proof, and any of the options below require that you put in a lot of work and effort!

1.Algorithmic Trading

Algorithmic trading is the best trading form out there for serious traders! By letting a computer run your trading strategies, which are all backtested and verified, you outrun your human counterparts both in terms of accuracy and speed.

The good thing about algorithmic trading is that it allows you to run multiple different strategies at the same time. This means that you can have multiple strategies relying on different edges traded for you at the same time. You also have complete control over your algorithms. This means that you can run your edges independently of one another or have them working at the same time.

If you are interested in learning more about Algorithmic Trading, why not have a look at our Complete Algorithmic Trading Guide!

If this seems too difficult, then Swing Trading might be the right trading form for you. Many of the students we’ve had over the years begin with swing trading, and then advance to algorithmic trading once they feel ready. If you want to read more about swing trading, we recommend that you have a look at our complete guide to swing trading.

2.Swing Trading

Safe Trading
Safe Trading

Swing trading is probably the best trading form for a beginner. It’s easy to learn, compared to other trading forms, and still offers great profit potential!

In swing trading, we try to catch swings that last for one day up to a couple of days at most. You could use many swing trading strategies, but mean reversion and trend following tend to be the most commonly used strategies!

One major advantage of swing trading is that once you get the hang of it, it does not demand a lot of time. In fact, it is possible for you to swing trade with a full time job, provided that you are willing to put in the time and effort required to learn and develop the strategies.

Here you can read more about Swing Trading!

3. Position Trading

Position trading is another trading form that could be traded profitably. In contrast to swing traders, position traders hold their positions for longer periods of time. Common holding periods could be anything from a couple of weeks to several months or a few years.

Another difference is that position traders often make use of fundamental analysis to a greater degree than swing traders. Most swing traders base their analysis solely on technical indicators and patterns, whereas position traders may include fundamental analysis in the mix, or in some cases exclude technical analysis completely!

Position Size

If you want to be a safe trader, then sizing your positions appropriately is very important. Usually, beginner traders should never risk more than 1% of their total capital on a single trade. Eventually, you can begin to experiment and risk more capital. Still, remember that most professional traders also utilize only a small amount of their capital on a single trade.

If you are looking for an easy way to size your positions, then you can use the Average True Range. ATR is a very good indicator and can help take your mind off of how big a position should be. You do not need to figure out the math behind the indicator. Instead, you should understand its theory and then use the indicator as it is available on pretty much every single stock screener and charting website.


Leverage is another important part of trading that new traders have trouble understanding.

Simply put, leverage increases your returns as well as your losses. This happens because your broker agrees to increase your position size by loaning you additional capital.

While leverage can be incredibly beneficial if put to good use, new traders are bound to make mistakes. Remember that leverage was one of the biggest reasons for the 2008 financial crisis, and it can wipe out your entire trading account very quickly.

As a safe trader, it is best if you avoid a margin account (a margin account is where you have access to leverage, so you can ‘trade on margin’). Once you get the hang of things, you can begin to experiment with leverage. Even when you have years of experience under your belt, you must be very careful with leverage! The same rule to not risk more than a certain amount of the trading capital applies here too, and needs to be taken into account!

Bottom Line

Trading is quite safe as long as you are careful and make sure that you have an edge!. If you are a new trader, you should immediately focus on a form that will be not too complex but profitable in the long run. This way, you will be able to survive through early mistakes and also reap handsome rewards later on.

It is also imperative that you do not take excessive risks when trading, and never let leverage carry your risk away to unacceptable levels!


Why is Finding an Edge in Trading Difficult Nowadays?

Finding an edge has become more challenging due to the Efficient Market Hypothesis, which suggests that markets are efficient and already price in all available information. The advent of the internet, high-frequency trading, and increased information availability has made markets more efficient and reduced arbitrage opportunities.

How Can I Find an Edge in Trading?

To find an edge, conduct extensive testing on historical data through backtesting. Look for hidden edges not widely used by traders, as public edges are likely to deteriorate as the market adjusts. Consistently developing and adapting new edges is crucial, as trading strategies do not last forever.

What is Position Trading, and How Does it Differ from Swing Trading?

Position trading involves holding positions for longer periods, from weeks to months or even years. It differs from swing trading in terms of holding duration and the use of fundamental analysis. Swing traders focus on technical indicators, while position traders may include fundamental analysis in their strategies.


Here you can read more about algorithmic trading

Here you can read more about Swing Trading

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