Learn about the strategies for controlling risks while trading
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. The Forex market is uncontrollable – no single event, individual, or factor rules it. Just like any other speculative business, increased risk entails chances for a higher profit or 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 closed or exited your position, had you understood 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
Limit orders*, also known as “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 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.
*Please note that in this paragraph we refer to the traditional use of the “Limit order” term, which usually relates to profit-taking.
On the easy-forex® Trading Platform we offer both “Take Profit” (allowing your deal to automatically close when and if a certain profit has been reached) as well as the “Limit” instrument (which allows you to automatically open a Day-Trading deal, when and if a certain rate, which you “reserved”, appears in 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. They 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 glad that you placed them.
Where should I place my Stop Loss and Take Profit orders?
Our general forex tip would be that, traders should set Stop Loss orders closer to the opening price than Take Profit orders. Where the trader places the Stop Loss and Take Profit orders will depend on how averse they are to risk. 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 you want 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 current exchange rate.
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.
Do not invest money you cannot afford to lose.
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 Forex 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.
easyMarkets’ 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.
Strategies against risk: lowering risk when trading forex:
Learn to 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 Take Profit 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.
Forex tip: In a bull market, be long or neutral – in a bear market, be short or neutral. And never add to a losing position. On the easyMarkets platform, traders can, as many times as they wish, change the setting of their Stop Loss or Take Profit rates while the deal is still running. The trader can also close the trade manually without a Stop Loss or Take Profit 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.