Intelligent Risk Management Solutions For FX Traders
If you are doing any kind of Forex trading online right now, then it is likely that you have had at least some training in the importance of placing stop loss orders. By itself, the Forex trading market is not the most volatile of all the trading markets. In fact, individual stocks as trading vehicles are much more volatile than even the liveliest of Forex pairs which at the present time would be the British Pound vs. the Yen. Volatility is not What makes foreign exchange trading so potentially dangerous for the individual investor, but rather the amount of leverage that is customarily used by traders of foreign currency. At best, equity day traders can borrow 50% of the principal value of the instruments that they are trading at any given time. Forex traders often “borrow” 90% or more of the principal value of their positions, therefore; even very small moves for or against the Forex trader will generate instant and comparatively large changes in account equity tick by tick.
To better illuminate concept behind the above volatility comparison between stocks and Forex consider this: It is not uncommon at all for high beta stocks to move 1 percent or more during any given trading session. In fact, since all publicly traded stocks must report their earnings quarterly there are 4 opportunities each year when these stocks are capable of being driven two or three percent higher or lower just in the few trading days before or after earnings reports. Stocks move, and the stock market as a whole regularly moves. A three percent move in a single day for the market is not extraordinary, and by itself is not very newsworthy. But, when was the last time you saw the Canadian dollar move up or down three percent (about 300 pips) in a single session? Perhaps never.
Trading currency is risky because of the leverage commonly employed by industry players, period. Intelligent traders are aware of that and take steps to mitigate large scale fiscal disaster by learning how to manage risk, and for most of them — those that last in the business, the first step is learning about and understanding leverage. Leverage is how you can take a little bit of money and turn it into a lot of money real fast. The more leverage you use, the faster you can make it. At some point the use of leverage is really just an abuse of it, and then the trading activity associated with that is really something that has more in common with straight up gambling than it does with any kind of prudent business activity.
When you first undertake to do any kind of investment activity that involves trading in Forex, you are presented with a standard risk disclosure document that you are advised to read and execute which gives your Forex broker notice that you understand the risks associated with the FX trade business. Only then are you given the authority to use your broker’s platform in order to begin trading online. Needless to say, the risk factors associated with the use of leverage presented to you in this disclosure are there for a reason. It is very wise to read that part of the disclosure document carefully, and as many times as you need to so that you can truly understand the power of leverage and the price that you will pay if you undertake to abuse that power. If you have ever wondered why Forex trading is regarded as so very hard to master, and why so many people fail at it, then you can take it as a settled fact that at the heart of it, a fundamental misunderstanding, and the consequential abuse of leverage is the reason.
In Part Two of this essay we will delve more deeply into the subject of leverage and how it is used by smart risk managers who win and abused by the 90% + of all the losing Forex currency speculators.
| Click Here | to access part two of this article.
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