Tag: forex

Risk Management in Forex

Gestão de Risco Forex

Learn how to do effective Forex Risk Management so you don’t blow your Forex account. This is what professional traders do. Do the same!

On many occasions we see a lot of Forex Traders planning their trades using proper technical analysis or fundamental analysis, and yet they fail on another essential point, which is risk management.

Managing risk correctly does not mean that in all cases the leverage you put on a position is minimal, without diversifying the position by using different pairs. We observe how that old belief that when the EUR/USD pair was going up, the same thing would happen to the GBP/USD pair, and in a contrary way, at the same time, the USD/CHF and USD/JPY pairs, would suffer similar movements.

How to Create a Risk Management Strategy?

Today, the different economic situations experienced by the central economies mean that each pair has a “life of its own”, and just as we have seen that the USD/JPY pair has almost misbehaved in recent weeks, the USD/CAD, which generally moves in the same direction and at the same time, is at multi-decade lows, in favor of rising oil prices.

Far from making the market unpredictable, these totally different movements of the so-called major pairs, give excellent opportunities, not only in the pairs that include the Dollar, but also in the so-called cross pairs, which include the Yen, the Swiss Franc, the Canadian Dollar, etc.

The analysis proposal in this opportunity, consists in not excessively increasing the risk of a trade, but rather placing the same amount of lots that is usually placed but divided in several pairs, which, if the Trader is conscious that at least 20% of his trades will be of losses, by the infallible nature of any forex strategy chosen, at least he will be able to obtain profits in the majority of his positions, compensating in some cases possible losses, and obtaining benefits by the big difference of profitable positions in relation to the unprofitable ones.

By this we are not saying that it is convenient to trade 15 currency pairs at the same time, nor much less. But rather, that it is appropriate to extend the analysis that a trader usually performs on 2 or 3 pairs to at least 8 pairs, and to trade with awareness when the strategy shows reasons for possible profits.

This way, although the total risk assumed in the amount of simultaneous positions is similar, you can probably exit several trades quickly, and you can work without the worry of being close to your risk margin, without putting your losses at risk.

Although we suggest not to invest when news about the macroeconomic state is released, due to the unpredictable state that the market can take at those times, on occasions like these it is necessary to be careful. The best forex strategy is to analyze the situation well and wait until the trend normalizes, and you can analyze the market again without heavy losses.


Forex Glossary: Learn the terms and their definitions

Opening order (position) – the process of buying or selling a certain volume of financial instruments for profit on the change of quotes in a favorable direction. To fix the results in trading you need to close the order.

Leverage – an instrument that allows someone to trade larger sums, having only part of the sum. For example, with a leverage of 1:100, you can conduct a trade with volume of 100,000 EUR having only 1,000 EUR in your own funds.

Fundamental analysis – a type of market analysis where the forecast is based on financial market news; an analysis of political and economic information to predict market movements.

Technical analysis (chart analysis) – a type of market analysis where the forecast is based on the fact that the market has memory and future changes will be influenced by patterns in its past behavior.

Arbitrage – the transfer of funds from one market to another to profit from the difference in interest rates, exchange rates, or commodity prices.

Ask – the price at which you can buy currencies. The Ask price is higher than the Bid price.

Aussie (AUD) – slang for Australian dollar.

Central Bank – a bank that provides financial services to its country’s government and commercial banks.

Bear – an investor who counts on the devaluation of a currency.

Bid – the price at which you can sell currencies. The Bid price is lower than the Ask price.

Broker – an individual or company that takes on the responsibility of being an agent between a buyer and seller of financial instruments, while charging a fee (commission charges).

Bull – the investor who counts on the appreciation of a currency.

Buy limit – a pending order to buy at a price lower than the current price level (buy cheaper than now). It is placed with the expectation that the price will fall to a certain level and then start to rise again.

Buy stop – a pending order to buy at a higher price than the current price level (buy more expensive than now). It is placed with the expectation that the market price will reach a certain level and continue to rise.

Cable – slang used to refer to the pound. It is called this because the first price quotations were sent to America via transatlantic cable during the 19th century.

Capital – an indicator that characterizes the status of the investor’s account at the moment. It is calculated like this: capital = balance + floating profit – floating losses.

Candlesticks – one of the methods of displaying on charts changes in the values of financial instruments.

Margin call – a notification that shows that there is only a small amount of funds left on the investment account and that in case of unfavorable market movement, a stop out may occur. This notification is sent at the moment when the remaining funds in the investment account reach a certain percentage of the margin (for example, 40%).

Account – the record in the database that contains information about the user and other system objects.

Non-market quote – a quote that meets the following conditions:

  • the presence of a significant gap in price;
  • the return of the price within a short period to the initial level of the gap formation in the price;
  • the absence of rapid dynamics in the price before the appearance of such a quote
  • the absence of important economic news that considerably influence the value of the financial instrument at the moment of the appearance of such a quote.

Day trading – investment operations that are concluded within one day.

Trader/Dealer – an individual or company, with whom an investor has an agreement governing the basics of investment operations. The dealer has the responsibility to act as the representative of the transaction.

Deposit – funds sent to an account for future transactions.

Diversification – a strategy that aims to reduce risks by spreading investments across different financial instruments or investment objects.

Closing order (position) – the reverse process of buying/selling a certain volume of financial instruments, which compensates for the buying/selling volume of the opening position.

Execution at market price – the method of order execution, where the order is executed anyway. If the price changes at the moment of execution, the order will be executed with the new current price.

Instant execution – the method of order execution, where the order is executed at the indicated price. If the price changes while it is being sent to the trading server, the client receives a notification about the price change (requote). The investor can accept the new price or refuse order execution.

Expert Advisor – an automatic system (script) that executes orders without investor’s participation based on the predetermined algorithm.

Apartment – a period when the price stays in the same range and does not express the direction of growth or devaluation.

Gap – the gaps in the price charts caused by the difference between the opening price of a trading period and the closing price of the previous period. This can occur due to unforeseen circumstances (e.g. after the weekend).

Hedging – the use of a financial instrument to reduce risks, which has connection with the influence of unfavorable market factors on the price of another financial instrument, associated with the former or with the monetary flow they generate.

Indicator – a computerized analysis tool of price movements based on statistical data, used in technical analysis.

Financial Instrument – a type of product in the financial environment (i.e. currencies, stocks, futures, options, etc.)

Kiwi (NZD) – slang for the New Zealand currency (New Zealand dollar).

Liquidity – the characteristic of one asset to turn into another. Greater liquidity gives the opportunity to make a large trade without being affected by a significant change in price.

Lock – the existence of two positions of a financial instrument open in different oppositions at the same time.

Long – the position to buy. Your profit increases when the market price rises.

Lot – a certain amount of units or the sum of assets used to execute the trade of a certain instrument (for currency pairs, a standard Forex lot is 100,000 units of the base currency).

Profit – a positive increase in the balance, investment or trading result, after expenses have been deducted.

Margin – the collateral required to execute a trade with the aid of leverage. For example, if the leverage is 1:100 and the order volume is 10,000 EUR, the margin is 100 EUR.

Market-maker – a large bank or financial organization that determines the current exchange rates due to the large share of its operations in the total market volume.

Base currency – the currency that appears first in the currency pair. All transactions are made with the base currency.

Counter Currency – the currency that appears second in the currency pair. The price of the base currency is reflected with its help.

Automatic trading – the method of trading where special programs execute orders on behalf of the investor, based on a particular system but without the investor’s participation.

News-based trading – a type of investment system, the essence of which is to make profit in price ranges at times of important economic news releases.

Resistance level – the term in technical analysis that determines the level at which market participants usually start selling.

Support level – the term in technical analysis which determines the level where market participants usually start buying.

Order (position) – instructions from the client to execute a trade at a specific price (buy or sell one currency for another). After the order is opened, it must be closed to fix the profit or loss.

Pending order – an order to buy or sell financial instruments in the future, when the price reaches the level indicated in the order.

Currency pair – a financial instrument that is traded on the foreign currency exchange market. A currency pair is made up of two currencies, which are described as the ratio of one to the other. For example, USD/JPY. The result is called the exchange rate or quote.

Cross Currency Pairs – Currency pairs that do not include the USD. For example, EUR/JPY.

Pips (points) – the unit of price change in financial instruments (0.0001). For example, if the quote changes from 1.3000 to 1.3001, it means that the change was 1 pip (point). The fractional unit of price change is used in NDD and ECN accounts, which means that the quote can change by 0.1 pips and will look like 1.30011.

Trading platform (trading terminal) – an investor’s software, which allows him to execute trades from a computer or other telecommunication device.

Major – major currency pairs: EUR/USD, GBP/USD, USD/JPY, USD/CHF, AUD/USD, GBP/JPY, EUR/JPY and USD/CAD.

Requote – a notification in the trading terminal about price changes during the process of placing an order. You can either accept the new price or cancel the order execution. Requotes can appear on accounts with Instant Execution.

Balance – the sum of funds on an investment account after the finalization of the last transaction in a given period.

Scalping – an investment strategy where the investor executes a large number of orders over a short period of time (even a few seconds) and fixes the profit at several pips.

Sell limit – a pending order to sell at a price higher than the current price level (sell more expensive than now). It is placed with the expectation that the market price will rise to a certain level and then start to fall.

Sell stop – a pending order to sell at a price lower than the current price level (sell cheaper than now). It is placed with the expectation that the market price will fall to a certain level and then will continue to fall.

Short – a position to sell. Its profit increases with the devaluation of the market price.

Slippage – the amount of market movement between the moment of order placement and its execution. It is the situation where the order is executed at a better/worse price than the price stated in the order. This can happen, for example, at times of high market volatility.

Spread – the real-time difference between the Bid and Ask prices of one currency for another.

Stop out – the process of automatically closing an order. This procedure occurs the moment the remaining balance on an investment account reaches a certain percentage of the margin (for example, 20%).

Stop loss – a type of pending order, which helps to limit losses when trading.

Swissy (СHF) – slang for the Swiss franc.

Swap – fee charged for transposing open orders through the night. Funds can be deducted or added from/to the account.

Take profit – a type of pending order that helps to lock in (take) profits when trading.

Exchange Rate (Quote) – a ratio of the price of one currency to another at any given time. For example, 1 EUR can be bought for 1.3000 USD. This would be shown as: EUR/USD = 1.3000.

Trailing stop – an instrument that “pushes” the stop loss level to a certain distance from the current price until the market turns around and passes it. It is useful during periods of strong movement in a single direction.

Trend – clearly seen market movement in one direction (up – bullish, down – bearish, sideways – apartment).

Volatility – the strength of the change in exchange rates.

Volume – the amount of a financial instrument that is traded during a certain period.


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