RISK
MANAGEMENT STRATEGY
Currency
markets are highly speculative and volatile
in nature. Any currency can become very expensive
or very cheap in relation to its counterpart
in a matter of days, hours, or sometimes,
even minutes. This unpredictable nature of
currencies is what attracts an investor to
trade and invest in the currency market.
The
Forex market behaves very differently from all
other markets. Speed, volatility, and the enormous
size of the Forex market are unlike anything
else in the financial world. The Forex market
is therefore uncontrollable - no single event,
individual, or factor rules it. Just like any
other speculative business, increased risk entails
chances for gains/loss. |
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There
are things, that every trader should know both BEFORE
and DURING a trade.
Exit
the market at pre-determined targets
Limit orders, also known as exit orders, allow Forex
traders to exit the Forex market at their pre-determined
targets. If one is short on a currency pair, the system
will only allow one to place a limit order below the
current market price. Similarly, if you are long on
a currency pair, the system will only allow one to place
a limit order above the current market price. Limit
orders help create a disciplined trading methodology
and make it possible for traders to walk away from the
computer without continuously monitoring the market.
Control
risk by capping losses
Stop/loss orders allow traders to set an exit point
for a losing trade. If one is short on a currency pair,
the stop/loss order should be placed above the current
market price. If one is long on the currency pair, the
stop/loss order should be placed below the current market
price. Stop/loss orders help traders control risk by
capping losses. Stop/loss orders are counter-intuitive
because traders do not want them to be hit, however,
the trader would be happy that he had placed them. When
logic dictates, one can control greed.
Where
the trader places his stop and limit will depend on
how risk-averse he is. Stop/loss orders should not be
so tight that normal market volatility triggers the
order. Similarly, limit orders should reflect a realistic
expectation of gains based on the markets trading activity
and the length of time one wants to hold the position.
Trading
foreign currencies is a demanding opportunity for trained
and experienced investors. However, before deciding
to participate in the Forex market, one should soberly
reflect on the desired result of investment and level
of experience. Any transaction involving currencies
involves risks including, but not limited to, the potential
for changing political and/or economic conditions that
may substantially affect the price or liquidity of a
currency.
Moreover,
the leveraged* nature of FX trading means that any market
movement will have an equally proportional effect on
deposited funds. The possibility exists that you could
sustain a total loss of your initial margin funds and
be required to deposit additional funds to maintain
a position. If you fail to meet any margin call within
the time prescribed, the positions would be liquidated
and they would be responsible for any resulting losses.
'Stop-loss' or 'limit' order strategies may lower an
investor's exposure to risk.
Lowering
risk whilst trading
Trade, like a technical analyst. Understanding the fundamentals
behind an investment also requires understanding technical
analysis. When fundamental and technical signals point
to the same direction, you have a good chance of having
a successful trade, especially with good money management
skills.
Technical
traders use charts, trend lines, support and resistance
levels, numerous patterns and mathematical analyses
to identify trading opportunities, whereas fundamentalists
foretell price movements by interpreting variety of
economic data, including news, government-issued indicators
and reports, and even rumors. The most exciting price
movements however, happen when unexpected events occur.
Such events may range from a Central bank raising domestic
interest rates to the outcome of an act of war or just
a political election. Still, more often it is the expectation
of an event that drives the market rather than concrete
event.
Therefore,
'Be disciplined!'. Create a position, understand the
reason for having taken that position, and establish
stop loss and target levels. Discipline includes hitting
stops and not following the temptation to stay with
a losing position that has gone through stop-loss level.
Rule of thumb: In a bull market, be long or neutral
- in a bear market, be short or neutral. If one forgets
this rule and trades against the trend, one will suffer
not only psychological worries but also frequent losses.
Never add to a losing position. Many successful traders
set their stops beyond the rate at which they made the
trade so that the worst that can happen is that they
get stopped out.
*
Without proper risk management, this high degree of
leverage can lead to large losses as well as gains
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