Risk Warning
Utilizing Stop Loss OrderTrading foreign currencies is a challenging
and potentially profitable opportunity for educated and experienced
investors. However, before deciding to participate in the Forex
market, you should carefully consider your investment objectives,
level of experience and risk appetite. Most importantly, do not
invest money you cannot afford to lose.
There is considerable exposure to risk in any foreign exchange
transaction. Any transaction involving currencies involves risks
including, but not limited to, the potential for changing political
and/or economic conditions that may substantially affect the price
or liquidity of a currency. Moreover, the leveraged nature of
FX trading means that any market movement will have an effect
on your deposited funds proportionally equal to the leverage factor.
This may work against you as well as for you. The possibility
exists that you could sustain a total loss of initial margin funds
and be required to deposit additional funds to maintain your position.
If you fail to meet any margin call within the time prescribed,
your position will be liquidated and you will be responsible for
any resulting losses. Investors may lower their exposure to risk
by employing risk-reducing strategies such as 'stop-loss' or 'limit'
orders.
There are also risks associated with utilizing an internet-based
deal execution software application including, but not limited,
to the failure of hardware and software and communications difficulties.
Risk Management
The Forex Market is the largest and most liquid financial market
in the world. Since macroeconomic forces are one of the main drivers
of the value of currencies in the global economy, currencies tend
to have the most identifiable trend patterns. Therefore, the Forex
market is a very attractive market for active traders, and presumably
where they should be the most successful. However, success has
been limited mainly for the following reasons:
Many traders come with false expectations of the profit potential,
and lack the discipline required for trading. Short term trading
is not an amateur's game and is not the way most people will achieve
quick riches. Simply because Forex trading may seem exotic or
less familiar then traditional markets (i.e. equities, futures,
etc.), it does not mean that the rules of finance and simple logic
are suspended. One cannot hope to make extraordinary gains without
taking extraordinary risks, and that means suffering inconsistent
trading performance that often leads to large losses. Trading
currencies is not easy, and many traders with years of experience
still incur periodic losses. One must realize that trading takes
time to master and there are absolutely no short cuts to this
process.
The most enticing aspect of trading Forex is the high degree
of leverage used. Leverage seems very attractive to those who
are expecting to turn small amounts of money into large amounts
in a short period of time. However, leverage is a double-edged
sword. Just because one lot ($10,000) of currency only requires
$100 as a minimum margin deposit, it does not mean that a trader
with $1,000 in his account should be easily able to trade 10 lots.
One lot is $10,000 and should be treated as a $100,000 investment
and not the $1000 put up as margin. Most traders analyze the charts
correctly and place sensible trades, yet they tend to over leverage
themselves (get in with a position that is too big for their portfolio),
and as a consequence, often end up forced to exit a position at
the wrong time.
For example, if your account value is $10,000 and you place a
trade for 1 lot, you are in effect, leveraging yourself 10 to
1, which is a very significant level of leverage. Most professional
money managers will leverage no more then 3 or 4 times. Trading
in small increments with protective stops on your positions will
allow one the opportunity to be successful in Forex trading.
Utilizing Stop Loss Order
A stop-loss is an order linked to a specific position for the
purpose of closing that position and preventing the position from
accruing additional losses. A stop-loss order placed on a Buy
(or Long) position is a stop-loss order to Sell and close that
position. A stop-loss order placed on a Sell (or Short) position
is a stop-loss order to Buy and close that position. A stop-loss
order remains in effect until the position is liquidated or the
client cancels the stop-loss order. As an example, if an investor
is Long (Buy) USD at 120.27, they might wish to put in a stop-loss
order to Sell at 119.49, which would limit the loss on the position
to the difference between the two rates (120.27-119.49) should
the dollar depreciate below 119.49. A stop-loss would not be executed
and the position would remain open until the market trades at
the stop-loss level. Stop-loss orders are an essential tool for
controlling your risk in currency trading.
