Risk Management Tools and Techniques

Trading on the FOREX market is exciting, but what makes it so exciting is what simultaneously makes it risky – volatility. Certain trading strategies depend heavily on this volatility and make high frequency trades hoping to take advantage of it, but exposing your capital to volatility can result in losses.

There are ways to protect your assets from volatility though - through various tools and techniques you can manage it and expose yourself only to the amount of risk you are comfortable with. First and foremost – the best risk management tool any trader has in their arsenal is knowledge. Knowing what economic and geopolitical events happened, are happening or will happen will help you adapt and dynamically pivot your trading strategy and goals when necessary.

Know When Leverage is Your Friend

Leverage is a tool used throughout the financial industry and very frequently in FOREX, remember that leverage has the potential to multiply your gains, but it can also multiply your losses. Just because you may have access to high leverage, knowing when to use it will help you avoid surpassing your risk limit.

Custom Alerts

Certain trading platforms allow user customizability in the form of EAs (Expert Advisor) which are programs that can perform various functions within the trading environment. One function EAs can do is sending notifications to traders if their position or instrument surpasses predetermined price levels. Some EAs even allow for automatic closing or opening of positions, but this automated process could expose you to even more volatility caused by unforeseen geopolitical events or an abrupt change in market sentiment, so caution is important when using these.

Become Your own Therapist - Trader’s Psychology

A frequently used term, put simply it is entering or exiting a position or trade too soon or too late, resulting in unfavorable results. A great example of this frequently happens when an instrument is in retracement but not in a full-blown reversal – causing the trader to panic and exit a trade only to see the price of the instrument recover shortly thereafter. Another example is when market sentiment drives up the price of an instrument – causing traders to jump on a “train” which is stuck at the station (the station being in this analogy, the current price of the instrument when you opened the position).

Be Your Own Warden – Discipline

This may seem like advice which is more applicable to a mystic form of martial arts, but if you ask any experienced investor, they will undoubtedly mention “discipline” as a key component of reaching your investment goals. Developing a strategy that defines both your goals and risk appetite is only useful if you stick to it. Having a knee-jerk reaction to abrupt market fluctuations is almost a sure-fire way to expose yourself to unplanned and unforeseen risk.   

Safe-Havens Are Your Friends – During Market Volatility

A few years ago George Soros went on record saying that gold was the ultimate bubble, but a few years later invested in a the SPDR Gold Trust with tremendous results. Safe-haven currencies and commodities have been the go to – well, safe-haven – for serious, experienced and knowledgeable investors during times of market volatility. What better hand-book to take a page from than from the book of serious investors, like Soros.

Stop Loss Limits

This is an oft-used tool traders implement when managing risk – it is a level set by the user that automatically closes the position when their designated level of loss is reached. For example you can set your Stop Loss limit 10% under the price the instrument was at when you opened the position, exposing only that equivalent of your initial capital to that loss (plus any broker fees accrued by opening and closing positions).

dealCancellation – Cancel a Losing Deal

Most brokers offer ways to minimize exposer to risk, but easyMarkets offers its traders the ability to cancel losing trades with one simple click. If your stop loss is reached before the dealCancellation time limit is reached, and still recover your invested amount. When opening the trading, click on dealCancellation and it allows you to cancel your order within a predetermined period of time for a small fee. This is a great tool, for example when economic calendar events can affect the movement of a currency or investment instrument in unpredictable ways. 

Exposing yourself to risk when trading is inevitable, but at least you can avoid exposing yourself to unnecessary risk with knowledge, the right tools and of course partnering with the right broker.

Sources:

• forex.info - 5 Risk Management Strategies from the Pros
• babypips - Never Underestimate Leverage
• Financial Times - Risk management is an essential tool for making profits