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 cannot be controlled - no single event, individual, or factor rules it. As such, it is the closest market to what economists call “a perfect market”! However, just like any other speculative business, increased risk entails chances for a higher profits as well as higher losses.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. The unpredictable nature of currencies is what attracts an investor to trade and invest in this market.
Truly ask yourself: "How much am I ready to lose?"
When you terminated, closed or exited your position, had you understood the risks and taken steps to avoid them?
Some foreign exchange risk management issues
The following may come up in your day-to-day foreign exchange transactions.
These are issues every trader should cover, both before and during a trade.
Exit the Forex market at profit targets
Limit orders, also known as Take-Profit 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. 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.
Where should I place my Stop-Loss 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 who uses 30 pip Stop-Loss and 100-pip Take-Profit orders, needs to be right only one-third of the time to make a profit. Where traders place Stop-Loss and Take-Profit orders will depend on how risk-averse they are. 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. When initially setting up a trade, it is prudent to look to change the Stop-Loss and set it at a rate in the “middle ground” where you are not overexposed to the trade, and at the same time, are 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.
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 “Take-Profit” order strategies may lower an investor's exposure to risk.
Avoiding/reducing risk when trading Forex
Trade like a technical analyst does. For the best possible results, understanding the fundamentals behind an investment also requires understanding the technical analysis method. When your fundamental and technical signals point in the same direction, you have a good chance of having a successful trade, especially with good money management skills. Use simple support and resistance technical analysis, Fibonacci Retracing and reversal days.
Discipline includes hitting your stops and not following the temptation to stay with a losing position that has gone through your Stop-Loss level. A good rule of thumb is: 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 worries, and frequently, losses.
Never add to a losing position. On the Easy-Forex™ platform, traders 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 Take-Profit order being hit.
Many successful traders update their Stop-Loss price in their “live” positions beyond the rate at which they made the trade, so that the worst that can happen is that they get stopped out and still make a profit.
Beware: the Forex market cannot be controlled - no single event, individual, or factor rules it. As such, it is the closest market to what economists call “a perfect market”! However, just like any other speculative business, increased risk entails chances for a higher profits as well as higher losses.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. The unpredictable nature of currencies is what attracts an investor to trade and invest in this market.
Truly ask yourself: "How much am I ready to lose?"
When you terminated, closed or exited your position, had you understood the risks and taken steps to avoid them?
Some foreign exchange risk management issues
The following 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 issues every trader should cover, both before and during a trade.
Exit the Forex market at profit targets
Limit orders, also known as Take-Profit 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. 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.
Where should I place my Stop-Loss 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 who uses 30 pip Stop-Loss and 100-pip Take-Profit orders, needs to be right only one-third of the time to make a profit. Where traders place Stop-Loss and Take-Profit orders will depend on how risk-averse they are. 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. When initially setting up a trade, it is prudent to look to change the Stop-Loss and set it at a rate in the “middle ground” where you are not overexposed to the trade, and at the same time, are 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.
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 “Take-Profit” order strategies may lower an investor's exposure to risk.
Avoiding/reducing risk when trading Forex
Trade like a technical analyst does. For the best possible results, understanding the fundamentals behind an investment also requires understanding the technical analysis method. When your fundamental and technical signals point in the same direction, you have a good chance of having a successful trade, especially with good money management skills. Use simple support and resistance technical analysis, Fibonacci Retracing and reversal days.
- Be disciplined;Create a position and understand your reasons for having that position;
- 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. A good rule of thumb is: 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 worries, and frequently, losses.
Never add to a losing position. On the Easy-Forex™ platform, traders 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 Take-Profit order being hit.
Many successful traders update their Stop-Loss price in their “live” positions beyond the rate at which they made the trade, so that the worst that can happen is that they get stopped out and still make a profit.