With trillions of dollars traded daily, the foreign exchange (forex) market is complex. Based on speculating currency prices in pursuit of profit, this global marketplace carries as many risks as it does opportunities.
Having comprehensive forex risk management in place is a fundamental aspect of operating within the forex market. With volatile currency fluctuations, because of local and global market conditions, a plan to mitigate risk is the only way to ensure that a trader’s losses are kept to a minimum.
Bianca Botes, forex expert and Director at Citadel Global, shares five questions traders should ask themselves regarding their risk management strategy:
- IS MY TRADING PLAN COMPREHENSIVE AND REALISTIC?
Be it for personal or business trading, you can’t simply jump into trading without a thorough trading plan in place. Your trading plan will help to identify your trading style, which currency pairs to trade and what your limits are. Without this critical framework, your trading will likely be haphazard because of emotionally based, reactive decision-making.
- AM I ADEQUATELY HEDGING AGAINST CURRENCY RISK?
To safeguard against volatile foreign currencies, a robust risk management strategy should always ensure that you adequately hedge against risk. Two effective methods to hedge against foreign currency exposure are forward contracts and currency options. These methods are privately negotiated between two parties rather than being traded in centralised markets.
- AM I USING STOPS AND LIMITS EFFECTIVELY?
By using stops and limits, you can rest easy knowing that your trades will stick within the confines you set, upfront. A stop is the beginning of a stipulated price mark for the trade, whereas a limit is outside of the price mark for the trade. The stop mark and the limit mark do not have to be a similar amount. These are good ways to keep within the prices you have set, however, it does not guarantee the trade will go through.
- AM I TOO EMOTIONALLY INVESTED TO BE TRADING ON MY OWN?
Currencies are interlinked, so understanding the correlation between them is a fundamental part of trading. However, this can make you prone to making decisions based on emotions or misinformation, rather than on facts. It is always better to remove emotion from trading and stick to the constraints you have set to minimise risk rather than to react. Having access to real-time information directly from the central banking systems of relevant countries greatly assists with realistic currency speculations.
- HOW CAN I FIND THE RIGHT SUPPORT?
When seeking the appropriate forex and treasury partner, you should seek a specialist that has two things:
- The right technology
- The knowledge and experience to interpret the data and optimise your trades in real-time
Forex specialists understand the markets holistically and can provide real-time information to hedge against risk and make use of opportunities as they arise. “Trust, experience and communication should form the foundation of your relationship with a forex partner,” concludes Botes.