RISK MANAGEMENT 1990s. Seriously, google it.
As far as derivatives go, we’ve really come a long way in the last 50 years or so, and so far we’ve mentioned a rather broad range of features and assets for use in risk management. From here on out, I’ll try to stick strictly to the forex market.
The different methods of risk management
We really have two main options to choose from if we want to hedge a position in the spot forex market; first being foreign currency options, and forex futures.
Foreign currency options is the most effective hedge if you’re looking to reduce your risk without reducing your ceiling too much, as is the issue with currency futures. Trading foreign currency options is very similar to trading any other options, only with the underlying asset being the proposed currency. If you’re interested in learning more about hedging your forex positions using options, then I would suggest first learning the ins and outs of options trading (if you aren’t already familiar with them), and then
The simplest, but most overlooked, method of risk management is as simple as doing the math
Te simplest, but most overlooked, method of risk management is as simple as doing the math. If you don’t already know pip values for each currency that you trade, or the formula for finding the pip value, then I would suggest you make yourself familiar with it IMMEDIATELY. Close all of your open positions and don’t look at another chart until you have mastered the ability of determining
study the basic theories of hedging at
www.investopedia.com or another free investment education website. I’m not trying to leave you wanting more, but it would take an entire article to do the topic of “Hedging using options” justice.
FX
pip values. It shouldn’t take you but a few minutes to learn the basic math required...go ahead, I’ll wait while you google it... Once you have learned how to determine the pip value of each individual currency pair that you’re trading, apply that information to every potential
trade before you place it in order to limit your risk to an acceptable amount.
Risk
Management in practice
Because some learn better by example, here’s a quick example using a potential long EURGBP position. Lets imagine that we’re trading
a USD-
based account valued at an even $100K, and that we never want to risk more than 2% (two per cent)
on any given trade. For those who are slow on the math, that means that we don’t want lose more than $2,000 per trade. In this situation, we know that, regardless of the current exchange rate, the EURGBP always has a 1 pip value of 10 Pounds per 100k lot. Also for the sake of this example, let’s imagine that the USDGBP is trading at 1.2869. Tis means that a 1 pip move in the EURGBP is worth $12.869.
FX TRADER MAGAZINE October - December 2017 57
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