Thursday, July 24, 2014

Limiting your Risks while trading the FOREX

FOREX trading can be risky, but there are ways to limit risk and financial exposure. Every FOREX trader should have a trading strategy -– knowing when to enter and exit the market and what kind of movements to expect. Developing strategies requires education -- the key to limiting risk in FOREX. At all times follow the basic rule: Do not place money in the FOREX that you cannot afford to lose. Means, learn and master the money management; set your targets according to your risk appetite.

Every FOREX trader needs to know at least the basics about technical analysis and how to read financial charts. He should study chart movements and indicators and understand how charts are interpreted. There is a vast amount of information on FOREX trading available both on the Internet and in print. If you want to be successful at FOREX, know what you are doing.

Even the most knowledgeable traders, however, can't predict with absolute certainty how the market will behave. For this reason, every FOREX transaction should take advantage of available tools designed to minimize loss. Stop-loss orders are the most common ways of minimizing risk when placing an entry order. A stop-loss order contains instructions to exit your position if the currency price reaches a certain point. If you take a long position (expecting the price to rise) you would place a stop loss order below current market price. If you take a short position (expecting the price to fall) you would place a stop loss order above current market price.

As an example, if you take a short position on USD/CAD it means you expect the US dollar to fall against the Canadian dollar. The quote is USD/CAD 1.02138/40 -- you can sell US$1 for CA$1.0238 dollars or sell CA$1.0240 for US$1.

You place an order like this:
   Sell USD/CAD: 1 standard lot USD/CAD @ 1.0238 = CA$102,380
   Pip Value: 1 pip = US$10
   Stop-Loss: 1.0248
   Margin: US$1,000 (1%)

You are selling US$100,000 and buying CA$102,380. Your stop loss order will be executed if the dollar goes above 1.0248, in which case you will lose US$100 (or a slightly more due to slippage).

However, USD/CAD falls to 1.0218/20. You can now sell US$1 for CA$1.0218 or sell CA$1.0220 for US$1.

Because you entered the transaction by selling US dollars (buying short), you must now buy back the US dollars and sell CAD dollars to realize your profit.

You buy back US$100,000 at the current USD/CAD rate of 1.0220 for a cost of CA$102,220. Since you originally sold them for CA$102,380 you made a profit of $160 Canadian dollars or US$156.55 (160 divided by the current exchange rate of 1.0220), less commissions if any.

Final rule of thumb is: Explore, learn and, or practice using a DEMO account as much as you can before placing any bids with your real money -- Is better either you seek advice from an Independent Investment Adviser, partner and, or with an Investment Management Consultant.

Please note that nothing ventured is nothing gained and that success and riches never come easy or on a platter of gold and this is the one truth I have learned from trading for our private banking clients.

1 comment:

aditi said...

Trades must identify their risk bearing capability and never go beyond it. Managing risk in an efficient manner helps to sustain in market on long term basis. Traders can also consult experts from financial advisory services to suggest with useful levels to trade with and improve their returns from market.