How to Manage Your Risk in Trading?

Discussion in 'Strategies & Systems' started by Sandra S., Oct 24, 2015.

  1. Sandra S.

    Sandra S. Forum Member

    Sep 1, 2015
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    Risk Management Once you have the facts it is decision time. You can choose to do nothing or seek to reduce the exposures or to hedge them in whole or in part. The unforgivable sins are to fail to consider the risks or fail to act on any decisions.

    The risk culture of your business is critical and must be established at the most senior level. Above all it calls for honesty. Too often individuals are criticized for decisions that, at the time, were in tune with the organization’s perceived appetite for risk. But it is never easy to set down effective guidelines and the range of exposures for even a simple transaction can be extensive. For example, an exporter needing to borrow to finance a sale in foreign currency may have to consider counterparty credit risk, funding risk and interest rate risk. The permutations are endless and the costs of hedging transactions to reduce or eliminate every possible exposure could potentially swallow any profit from a deal. While losses are likely to be quantitative, the potentially infinite number of risk combinations means that the skills needed to make good decisions are usually qualitative.

    Even a computer programmed to consider every conceivable permutation of risks needs to be told what level of exposure is acceptable. Any program is only as good as the parameters and data fed into it by people who have themselves been conditioned by experience. But what of the improbable, the wholly unexpected or the never-seen-before?

    Effective risk management requires thinking the unthinkable.
    This does not in any way lessen the great value of the many sophisticated risk-management systems available. The problems come if people start to think of them, and the models they are based on, as infallible. It is also common for the development of control systems to come after any new risk-related products. Be careful not to bet the business until the exposure is known. To be in business you must make decisions involving risk. However sophisticated the tools at your disposal you can never hope to provide for every contingency. But unpleasant surprises should be kept to a minimum.

    Ask yourself…

    1- Can the risks to your business be identified, what forms do they take and are they clearly understood - particularly if you have a portfolio of activities?

    2 - Do you grade the risks faced by your business in a structured way?

    3 - Do you know the maximum potential liability of each exposure?

    4 - Are decisions made on the basis of reliable and timely information?

    5 - Are the risks large in relation to the turnover of your business and what impact could they have on your profits and balance sheet?

    6 - Over what time periods do the risks exist?

    7 - Are the exposures one-off or are they recurring?

    8 - Do you know enough about the ways in which you exposures can be reduced or hedged and what it would cost including the potential loss of any upside profit?

    9 - Have trading and risk-management functions or decisions been adequately separated?

    Where to place stops

    We stop out of a trade when we no longer want to hold onto that particular position. The question that arises is: WHY do we want to get out of that trade? There can be 2 reasons for stopping out of a trade. EITHER the market tells us that our intrinsic View or Directional Assessments itself was wrong. OR we stop out of a trade (even if we still believe in our basic Bullish or Bearish reading) because we think we can establish another position at a better level than the previous one.

    The effort should be to choose a meaningful SL which is neither too close to the entry to get activated soon after entry (only to have the market go back in the original direction thereafter), nor so far away from the entry that we have no time or space left for follow up action.

    The difficult part about the paragraph above is that it requires us to have a Trading Plan or Strategy and to choose our Entry much more carefully than we tend to do, in accordance with that plan. Follow through action required we come back to the reasons for wanting to stop out.

    In the first case, when our directional reading has been proved wrong, we should look to enter into a trade in the opposite direction - a case of Stop-and-Reverse (SAR). It needs to be pointed out here that it is NOT necessary to SAR at the same instance and level all the time. If you are an intra-week (or longer) trader, you can enter into a reverse trade after stopping out of the original trade, allowing yourself time to reformulate your strategy.
  2. Jafar

    Jafar Well-Known Member Trader

    May 8, 2016
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    It's a very fine line, which has to be followed, risks should always be taken into account, but without forgetting that we are here on forex to make money.
  3. Sarfraz Ahmed

    Sarfraz Ahmed Well-Known Member Trader

    Jul 16, 2016
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    Risk is universal and it is quite challenging to manage it effectively. One needs to get adequate skills and keep improvising with time. Luckily one can simply invest with FreshForex with their 48% interest per annum risk free and earn passive income without actually doing thing! If they want to trade they can do it that too with excellent trading conditions and other supporting factors. So it is an effective way to earn and/or to trade.
  4. Maxi89

    Maxi89 Active Member Trader

    May 13, 2016
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    for me managine risks is still a painful question, since i still am not 100% competent in that area.
  5. nugruinc

    nugruinc New Member Trader

    Jun 6, 2017
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    The Risk culture of your business is basic and must be built up and no more senior level. Most importantly it calls for genuineness. Time after time people are scrutinized for choices that, at the time, were tuned in to the association's apparent craving for hazard. However, it is never simple to set down successful rules and the scope of exposures for even a straightforward exchange can be broad. For instance, an exporter expecting to get to back a deal in outside cash may need to consider counterparty credit hazard, subsidizing danger and financing cost chance. The stages are perpetual and the expenses of supporting exchanges to lessen or dispense with each conceivable presentation could possibly swallow any benefit from an arrangement. While misfortunes are probably going to be quantitative, the possibly endless number of hazard blends implies that the aptitudes expected to use sound judgment are generally subjective.

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