Risk management in forex trading

Be careful but don’t hesitate.
Be careful, your money can evaporate just like that if you dont pay attention to risk managemen in forex trading. Remember that forex trading investments are classified as high risk investment. This means that forex trading is considered having unpredictable return depends on risk management and your trading pattern. One of the highest risk among other financial investment instruments.
Risk factors that you should know before start forex trading:
1. Have the possibility of losing 100% funds
2. The flow of funds is very fast
3. There is no forex trading method that can guarantee you gain profit. There are many good trading method, but no one can guarantee 100% profit
4. Forex trading is not a “quick rich scheme” that can make you rich quick without working hard. There is no success without hard work. Hard work is an integral part of those who experience financial success in life. Including those who succeed through forex trading.
It takes hard work to learn the analysis and market behavior so that we can guess the direction of price movement accurately. So you’ll also need extra mental power when doing trading that results something that you dont expect.
Ask successful traders that you know, whether they had experienced ups and downs in their forex trading. And the answer almost certainly is “yes.” Success is only for those who want to try and learn continuously improve themself.
Associated with trading risks that must be faced if we want to start investing in forex, it needs special tips to minimize, or even reverse our position that was minus a positive return and earn a profit. Here are some tips and risk management you can take:

1. Cut Loss

Represents action to close your position opposite the market price movement. Cut loss used to limit the losses suffered to avoid even a greater losses.
For example, say we’re opening our position on Open Buy GBPUSD at 1.8000 price. Open a Buy position means that we expect prices to rise above 1.8000. Our hope as the price moves up to 1.8100 so that we can obtain 100 points profit. But suddenly the situation turns out and the price moves against what we expect. It turned out that the price goes down continually from 1.8000 to 1.7980 and still showed a tendency to fall.
Well, rather than experiencing a further loss or ultimately experience a margin call, the better decision is to bear the loss even though we closed minus 20 points (1.8000 to 1.7980 = -20 points). This action is called the cut loss of closing wrong positions in order to prevent greater losses.

2. Switching

This action is similar to cut loss, but the difference is after we close the wrong position (loss), we open a new position with the same direction as the market price movement. In the same case with a cut loss above, then we close our position at 1.7980 and then we open a new position Sell as prices tend to decrease. Thus, if prices continue to fall, say reach 1.7900 then our overall experience loss 20 points but gain profit by 80 points (1.7980-1.7900 = 80) so that the total profit we still get 60 points.
Tips For You: # Do it only if the profit prediction exceeds the loss of switching the first position which will be closed. # If it turns out the price change was in accordance with the first prediction, then you will suffer a 2 times loss, the first position and second position as well.

3. Averaging

This method requires extra capital to maintain the position we open that was moving against the market price movement. Say it is the same case with the example above (Cut Loss), if we want to take averaging action then we open a new position but in this case is not like switching (closing a loss position and then open a new position in opposite direction to the closed position). In averaging we are not closing our position which has been opened (in this case Open Buy) and then we open new positions in the same direction.
Why is that? The reason is simple, we would expect the price has come down then the price will go up so that when we perform a second Buy action and expecting the price moves up and even surpass our first Buy position so that we gain a double profit.

The three risk management mentioned above is very simple and easy to do. So, how unfortunately we suffered a loss just because we do not know the things above. But whether by knowing these three risk management we certainly will never experienced loss? No, of course not.
If you look at the three risk management above  relies on one thing: our ability to analyze price movements. Yes, that’s the core of forex trading. Risk management doesnt even become effective when we are not able to do the analysis correctly and accurately. So, knowing the analysis is imperative in starting an investment in forex trading.

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High Frequency Trading in FX

I recently had an interesting conversation with Arzhang Kamarai from Tradeworx about the role of high frequency trading (HFT) in equities versus foreign exchange (FX or forex), which prompted me to write about the complexities in migrating HFT strategies to this asset class.
Wikipedia defines HFT as “the execution of computerized trading strategies characterized by brief position-holding periods, in many cases taking advantage from [sic] microstructure inefficiencies. In high-frequency trading, programs analyze market data to capture trading opportunities that may open up for only a fraction of a second to several hours.”

Historically, HFT has been predominately focused on the equities market. It emerged as market structure changes created opportunities for arbitrage and as the market making and specialists businesses became less profitable. HFT grew quickly, and in 2010 accounted for as much as 70% of all equity trades in the US.
When HFT first emerged, the cost of entry was prohibitive for most players. But in the ensuing years, the cost for hardware, software, co-location, low latency connectivity and hardware acceleration have all declined. As the technology and infrastructure become more commoditized, more players enter the space, and that results in reduced profitability for everyone.
So the most sophisticated firms are increasingly looking to other instruments as profitability in equities declines. At the same time, foreign exchange (FX) increasingly has been traded as a distinct asset class. The FX market has grown very quickly in the past few years, growing from an average daily volume of $1.5 trillion USD in 2001 to more than $4.5 trillion in 2010 according to Aite Group. Sang Lee from Aite says, “High frequency trading will represent 35% of the FX trading volume this year (2010).”

The FX market is an interesting space for HFT. It’s traded over the counter, and no single bank controls a substantial percentage of the market. The top 10 global banks control more than 77% of the market. However, according to EuroMoney, the market share controlled by the top three banks actually declined in 2010 over their 2009 market share. There are a number of multi-dealer platforms or ECNs, but these combined control less than 15% of the market. A fragmented and inefficient market is an ideal target for effective HFT strategies.

Each bank or ECN publishes its own prices — generally derived from an aggregated book that sources liquidity from Tier 1 banks and from EBS and Reuters. This creates some interesting opportunities for algorithmic arbitrage strategies.  A hedge fund or HFT firm could aggregate liquidity from multiple banks simultaneously to find attractive prices for aggressive algorithms.

But it’s much more complicated than equities trading. For one thing, banks have to manage their risk, and so they watch order flow carefully. They may widen spreads or even stop publishing prices to a given customer if they sense predatory trading practices. So if an HFT firm wants to play in the FX market, it will need to develop flexible technology that allows it to respect relationships with the banks and play nice, allowing the banks to effectively hedge their risk. Firms that play fairly will be rewarded with better prices and deeper liquidity.

In addition, each bank and ECN offers different types of pricing and order types. Where one bank might stream firm prices, another might send indicative prices that are not executable. Most FX data is delivered in pulse intervals rather than continuously, and by the time the order arrives, the price may have moved substantially. So HFT firms will have their work cut out for them in developing liquidity aggregators, determining pricing, and creating smart order routers that are sensitive to distinctions in the various price feeds and to the relationships with the counter-parties.
HFT in the FX space requires substantial investment in technology and infrastructure. In FXCM’s S1 filing for Initial Public Offering, they state, “FX brokers cannot rely on standardized and inexpensive infrastructure solutions that are available to online equities brokers… This requires large investments of time and money but can result in points of competitive differentiation.”

MarketFactory.com has a helpful infographic that describes the differences between technology needs for HFT trading in equities and FX.
I’d like to hear your thoughts.  Do you think HFT will increasingly target the FX space?  What do HFT firms need to think about as they consider this asset class?  What do the dealing banks need to consider as they adapt their systems to handle this order flow?

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Learn to be Trader

Learn to be Trader

I’ve been thinking that free trading videos would be a big plus for Pipholic. Unfortunately I’m having technical difficulties and time-limitation to provide such learning materials.

There are actually many forex-learning resources which provide free trading videos,  InformedTrades is one of them. InformedTrades tries to help people learn to trade by providing trading courses. They incorporate a bunch of free trading videos within their free courses. I browsed around the site and found tremendous amount of info for those who want to know and learn to trade. InformedTrades cover both technical and non-technical sides of trading.

It seems that the host (David Waring) is trying to present the course-materials as systematic as possible. He categorize the course into 8 categories including course on forex, stock, futures and options trading. Up to this point you can see that InformedTrades is not only about forex trading.

I currently enjoy reading articles within Fundamental Analysis category. You know I’m poor in this field. Articles listed there are pretty well-written and has helped me a lot in learning this topic. This sub prime (loan) crisis article for example, gives “two thumbs up” introduction and explanation about sub prime loans and the issues they are causing for the consumer, the economy, and in the financial markets in general. You know that subprime loan has recently been associated to the current US Economic crisis

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