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Forex risk management strategies
The Forex market behaves differently from other markets! The
speed, volatility, and enormous size of the Forex market are
unlike anything else in the financial world. Beware: the Forex
market is uncontrollable - no single event, individual, or factor
rules it. Enjoy trading in the perfect market! Just like any
other speculative business, increased risk entails chances for
a higher profit/loss. |
Currency markets are highly speculative and volatile in nature.
Any currency can become very expensive or very cheap in relation
to any or all other currencies in a matter of days, hours, or sometimes,
in minutes. This unpredictable nature of the currencies is what
attracts an investor to trade and invest in the currency market.
But ask yourself, "How much am I ready to lose?" When you terminated,
closed or exited your position, did you understand the risks and
taken steps to avoid them? Let's look at some foreign exchange risk
management issues that may come up in your day-to-day foreign exchange
transactions.
- Unexpected corrections in currency exchange rates
- Wild variations in foreign exchange rates
- Volatile markets offering profit opportunities
- Lost payments
- Delayed confirmation of payments and receivables
- Divergence between bank drafts received and the contract price
These are areas that every trader should cover both BEFORE and
DURING a trade.
Exit the Forex market at profit targets
Take profit take orders, allow Forex traders to exit the Forex market
at pre-determined profit targets. If you are short (sold) a currency
pair, the system will only allow you to place a limit order below
the current market price because this is the profit zone. Similarly,
if you are long (bought) the currency pair, the system will only
allow you to place a take profit order above the current market
price. Take profit 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 you are short a currency pair, the stop/loss order should
be placed above the current market price. If you are long 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 you do not want them
to be hit; however, you will be happy that you placed them! When
logic dictates, you can control greed.
Where should I place my stop and take profit orders?
As a general rule of thumb, traders should set stop/loss orders
closer to the opening price than take profit orders. If this rule
is followed, a trader needs to be right less than 50% of the time
to be profitable. For example, a trader that uses a 30 pip stop/loss
and 100-pip take profit orders, needs only to be right 1/3 of the
time to make a profit. Where the trader places the stop and take
profit will depend on how risk-adverse he is. Stop/loss orders should
not be so tight that normal market volatility triggers the order.
Similarly, take profit orders should reflect a realistic expectation
of gains based on the market's trading activity and the length of
time one wants to hold the position. In initially setting up and
establishing the trade, the trader should look to change the stop
loss and set it at a rate in the 'middle ground' where they are
not overexposed to the trade, and at the same time, not too close
to the market.
Trading foreign currencies is a demanding and potentially profitable
opportunity for trained and experienced investors. However, before
deciding to participate in the Forex market, you should soberly
reflect on the desired result of your investment and your level
of experience. Warning! Do not invest money you cannot afford to
lose.
So, there is significant risk in any foreign exchange deal. 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 your deposited
funds. This may work against you as well as for you. The possibility
exists that you could sustain a total loss of your initial margin
funds and be required to deposit additional funds to maintain your
position. If you fail to meet any margin call within the time prescribed,
your position will be liquidated and you will be responsible for
any resulting losses. 'Stop-loss' or 'limit' order strategies may
lower an investor's exposure to risk.
Easy-Forex foreign exchange technology links around-the-clock
to the world's foreign currency exchange trading floors to get the
lowest foreign currency rates and to take every opportunity to make
or settle a transaction.
Avoiding/lowering risk when trading Forex:
Trade like a technical analyst. Understanding the fundamentals behind
an investment also requires understanding the technical analysis
method. When your fundamental and technical signals point to the
same direction, you have a good chance to have a successful trade,
especially with good money management skills. Use simple support
and resistance technical analysis, Fibonacci Retracement and reversal
days. Be disciplined. Create a position and understand your
reasons for having that position, and establish stop loss and profit
taking levels. Discipline includes hitting your stops and not following
the temptation to stay with a losing position that has gone through
your stop/loss level. When you buy, buy high. When you sell, sell
higher. Similarly, when you sell, sell low. When you buy, buy lower.
Rule of thumb: In a bull market, be long or neutral - in a bear
market, be short or neutral. If you forget this rule and trade against
the trend, you will usually cause yourself to suffer psychological
worries, and frequently, losses. And never add to a losing position.
On Easy-Forex the trader can change their trade orders as many times
as they wish free of charge, either as a stop loss or as a take
profit. The trader can also close the trade manually without a stop
loss or profit take order being hit. Many successful traders set
their stop loss price beyond the rate at which they made the trade
so that the worst that can happen is that they get stopped out and
make a profit.
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