FX RISK MANAGEMENT
a good laugh, just open Facebook, Instagram, or any number of social media sites, and you’ll find a number of self-proclaimed professional forex traders who have obviously doubled a demo account aſter a number of tries and now feel that they’re ready to teach Warren Buffet himself about the great opportunity that is Te Forex Market. Tese cats come in all shapes, sizes, colors, and s c r e en-name s (most have “FX” somewhere in their name), but they all have one thing in common; none of them can even estimate how much they actually risked on their
last trade.
Most of them will give an answer along the lines of “It was a 3:1 risk:reward”, but have no idea what they could have lost if their S/L had of triggered. Now, don’t bother criticizing these “mentors”, as they’ll be quick to block you and there goes all the entertainment.
Next, we’ll learn about the different methods of risk management. Finally, we’ll tie it all together and learn what works best for each situation.
A brief history of risk management
Prior to World War II, there was little
learn, at some point, about the origin of the options market being so that stock traders had the ability to limit their downside potential as a way to hedge their position.
What most don’t learn, however, is that the CBoT established the Chicago Board Options Exchange in 1972. Tis was the first exchange to list s tandardi z e d , exchange-traded stock options with the first day of trading being April
26, 1973.
The difference between an experienced trader and an amateur lies in risk management
If you’re not yet an “old-head” but also aren’t so full of yourself that you’re willing to learn a key to a long trading-life, then keep reading because we’re about to explore the world of risk management. First, we’ll explore a brief history of risk management.
56 FX TRADER MAGAZINE October - December 2017
to no “risk management”. Sources (Rockford, 1982; Harrington and Neihaus, 2003; Williams and Heins, 1995) say that the origin of risk management dates back to 1955-1964. Tis means that the evolved study of risk diversion is relatively young. Up until that point, derivatives were rarely used to cover financial products, as they didn’t exists; derivatives were mainly limited to agricultural products. To put this into perspective; most traders
For you book worms out there, you’ll know that just happens to be the 125th birthday of the CBoT. Anyways, I’m not trying to bore you to death with a lesson on history. I only want to get the point across that we are still VERY new to the world
of possibilities that is risk diversion. To drive the point home even further, Financial institutions (i.e. banks and insurance companies) didn’t intensify their market and credit risk management activities until the 1980s and operational risk and liquidity risk management didn’t emerge until the 1990s. Most of us have been alive for longer than that. I’m sure you’ve heard of the position “Risk manager”? Tat position wasn’t created until the
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