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.

    1 Unexpected corrections in currency exchange rates
    2 Wild variations in foreign exchange rates
    3 Volatile markets offering profit opportunities
    4 Lost payments
    5 Delayed confirmation of payments and receivables
    6 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 theForex 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.

Other Financial Services

 (1) Intermediation or advisory services - These services involve stock brokers and discount brokers. Stock brokers assist investors in buying or selling shares. Primarily internet-based companies are often referred to as discount brokerages, although many now have branch offices to assist clients. These brokerages primarily target individual investors. Full service and private client firms primarily assist execute trades and execute trades for clients with large amounts of capital to invest, such as large companies, wealthy individuals, and investment management funds.
 (2) Private equity - Private equity funds are typically closed-end funds, which usually take controlling equity stakes in businesses that are either private, or taken private once acquired. Private equity funds often use leveraged buyouts to acquire the firms in which they invest. The most successful private equity funds can generate returns significantly higher than provided by the equity markets
 (3) Venture capital is a type of private equity capital typically provided by professional, outside investors to new, high-potential-growth companies in the interest of taking the company to an IPO or trade sale of the business.
 (4) Angel investment - An angel investor or angel , is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity. A small but increasing number of angel investors organize themselves into angel groups or angel networks to share research and pool their investment capital.
 (5) Conglomerates - A financial services conglomerate is a financial services firm that is active in more than one sector of the financial servicesmarket e.g. life insurance, general insurance, health insurance, asset management, retail banking, wholesale banking, investment banking, etc. A key rationale for the existence of such businesses is the existence of diversification benefits that are present when different types of businesses are aggregated i.e. bad things don't always happen at the same time. As a consequence, economic capital for a conglomerate is usually substantially less than economic capital is for the sum of its parts.

Financial Service

Banks


A "commercial bank" is what is commonly referred to as simply a "bank". The term "commercial" is used to distinguish it from an "investment bank", a type of financial services entity which, instead of lending money directly to a business, helps businesses raise money from other firms in the form of bonds or stock.

 Banking services

The primary operations of banks include:

    1 Keeping money safe while also allowing withdrawals when needed
    2 Issuance of checkbooks so that bills can be paid and other kinds of payments can be delivered by post
    3 Provide personal loans, commercial loans, and mortgage loans (typically loans to purchase a home, property or business)
    4 Issuance of credit cards and processing of credit card transactions and billing
    5 Issuance of debit cards for use as a substitute for checks
    6 Allow financial transactions at branches or by using Automatic Teller Machines (ATMs)
    7 Provide wire transfers of funds and Electronic fund transfers between banks
    8 Facilitation of standing orders and direct debits, so payments for bills can be made automatically
    9 Provide overdraft agreements for the temporary advancement of the Bank's own money to meet monthly spending commitments of a customer in their current account.
    10 Provide Charge card advances of the Bank's own money for customers wishing to settle credit advances monthly.
    11 Provide a check guaranteed by the Bank itself and prepaid by the customer, such as a cashier's check or certified check.
    12 Notary service for financial and other documents

Other types of bank services
    1 Private banking - Private banks provide banking services exclusively to high net worth individuals. Many financial services firms require a person or family to have a certain minimum net worth to qualify for private banking services.Private banks often provide more personal services, such as wealth management and tax planning, than normal retail banks.
    2 Capital market bank - bank that underwrite debt and equity, assist company deals (advisory services, underwriting and advisory fees), and restructure debt into structured finance products.
    3 Bank cards - include both credit cards and debit cards. Bank Of America is the largest issuer of bank cards.
    4 Credit card machine services and networks - Companies which provide credit card machine and payment networks call themselves "merchant card providers".

Foreign exchange services

Foreign exchange services are provided by many banks around the world. Foreign exchange services include:

    1 Currency Exchange - where clients can purchase and sell foreign currency banknotes
    2 Wire transfer - where clients can send funds to international banks abroad
    3 Foreign Currency Banking - banking transactions are done in foreign currency

Investment services
    1 Asset management - the term usually given to describe companies which run collective investment funds.
    2 Hedge fund management - Hedge funds often employ the services of "prime brokerage" divisions at major investment banks to execute their trades.
    3 Custody services - the safe-keeping and processing of the world's securities trades and servicing the associated portfolios. Assets under custody in the world are approximately $100 trillion.

Insurance

    1 Insurance brokerage - Insurance brokers shop for insurance (generally corporate property and casualty insurance) on behalf of customers. Recently a number of websites have been created to give consumers basic price comparisons for services such as insurance, causing controversy within the industry.
    2 Insurance underwriting - Personal lines insurance underwriters actually underwrite insurance for individuals, a service still offered primarily through agents, insurance brokers, and stock brokers. Underwriters may also offer similar commercial lines of coverage for businesses. Activities include insurance and annuities, life insurance, retirement insurance, health insurance, and property & casualty insurance.
    3 Reinsurance - Reinsurance is insurance sold to insurers themselves, to protect them from catastrophic losses.

Stock

The stock or capital stock of a business entity represents the original capital paid or invested into the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors. Stock is distinct from the property and the assets of a business which may fluctuate in quantity and value.

The stock of a business is divided into shares, the total of which must be stated at the time of business formation. Given the total amount of money invested into the business, a share has a certain declared face value, commonly known as the par value of a share. The par value is the minimum amount of money that a business may issue and sell shares for in many jurisdictions and it is the value represented as capital in the accounting of the business. In other jurisdictions, however, shares may not have an associated par value at all. Such stock is often called non-par stock. Shares represent a fraction of ownership in a business. A business may declare different types (classes) of shares, each having distinctive ownership rules, privileges, or share values.

Ownership of shares is documented by issuance of a stock certificate. A stock certificate is a legal document that specifies the amount of shares owned by the shareholder, and other specifics of the shares, such as the par value, if any, or the class of the shares.

Used in the plural, stocks is often used as a synonym for shares. Traditionalist demands that the plural stocks be used only when referring to stock of more than one company are rarely heard nowadays.

In the stock can also refer to completely different financial instruments such as government bonds or, less commonly, to all kinds of marketable securities.