Risk and forex trading

[JTrader]

Forex has high liquidity, big priice movements and the ability to trade in very large amounts - thus the potential is there to make higher profits than in any other market - when trading the spot market through a retail forex broker, directly on the interbank market or through CME Globex futures.

I often read that for the above such reasons, forex the the most risky market to trade - as a trader can incur big losses.

However, my intraday trading approach is along the lines of the standard not risking more than 1% trading capital per single trade. As long as an (intraday) trader adheres to this philosophy - why should forex trading be seen as more risky than any other form of trading - UK stocks, indices etc. Do you agree?

Major economic news releases appear to be the main forces that drive forex price action, with a 100+ pip spike possible within seconds. For this reason a trader may find it difficult to exit a position at such times and stay within their 1% capital risk per trade rule......... The simple solution to this it would seem, is to keep out of trades during major news releases.

Are there any other reasons why forex trading is considered higher risk than other forms of trading? if so, what are they?

Do you think that forex trading is higher risk than other forms of trading? if so, why?


Many thanks

jtrader.

 

[JTrader]

ps.

would you consider the fact that forex trading is available with a 1% margin requirment, as being another factor as to why forex trading can be classified as high risk - as a trader can easily find themselves out of their depth?

or

Should the 1% margin requirement not be associated strongly with risk - because if a trader is able to exercise sound money management techniques - 1% margin trading should not be an issue?

 

[Buk]

hello (again) jtrader! good questions, and sure you'll receive some very conflicting replies

as you know, I trade the spot via brokers & sb....both swing & intraday. I don't find this instrument (Cable) risky to trade! but then, risk means diff things to diff folks. As well as the risk management parameters you state, the STRAT & methods/experience utilised play a big part in determining risk/reward.

I play the cable off a very basic, consistant approach geared around intraday/week s&r, combined with pivot/fibs & a couple wma's (macd div for good measure)....it works for me, and with tight exit awareness, offers me consistant plays up & down the ladder with (what I consider to be) limited risk!

each of us will have our own take on playing an instrument, and there's no right or wrong method....if it WORKS for you - then that's ALL that matters.

I'm a great believer in studying ONE intrument & attempting to observe/recognise behaviour traits around key numbers as well as typical (historical) patterns & movement....once again, it works for me.

I DON'T trade news releases, brokers fake & fade & play silly games around these reports, I wait for pullback signals or look for next level s&r to catch a trade either thru or contra to my levels, based on price.

As for your margins/% trade requirements : that really is an individual concern.....personally, I utilise slightly higher parameters & trade multi lots utilising a scale & add feature.....but then, I work a well defined combo strat, taking advantage of both scenario's (intraday & swing)

conventional T/A (imo) works just as well on the currencies as it does on any other candidate, and I believe it's down to the individual traders interpretation of the tools available to him to trade as effectively as he can!

hope it helps!.......

 

[Buk]

an example of what I mean re: punting off intraday/week s&r (to make things clearer).....please bear in mind, I trade this strat/method day in, day out....others will "see" different things & interpret price according to THEIR own visual/research parameters.

I trade off the round numbers/half primes consistantly on this instrument. Price kicks around the support & resistance camps continually, specially after trendy runs back & forth between key levels.......

the swingers haven't really played out the past couple quarters, merely chopping around in unpredictable patterns, tipping me out on more than 1 - 2 cent moves....therefore, I've zoomed back into the shorter frames, looking for tighter entries & trailing remaining lots thru the next century numbers, banking profits at selected s&r levels & adding back in on confirmed moves towards next level targets.

take today as a for instance.....Cable consolidated at the half prime after yesterday's run up to the psychological 1.80 number......it was a prev high point from last Fri, above the daily pivot & bouncing between the h/l fibs on the 5 min!.......

the reaction off the 61% support, combined with candle formation & accompanying signals, offered me (in my opinion) a low risk long entry with potential to test the top from y'days move.....clipping out at the top & trailing remaining stops to +10 profit lock allowed me the chance to observe how "genuine" this wiggle up was.....as it happens, I exited remaining lots for profit, and waited to see the reaction off the prev support (half prime)....price then continued to cut a range off this level, as it continually does, offering further intraday clips.

Working a strat, with confident knowledge of your instrument, coupled with consistant T/A helps in limiting your risk on ANY instrument......the rest is down to confidence in executing & sticking to your rules of engagement - period!!

 

[darrenf]

Iv'e never understood why people say trading fx is any more risky than trading other instruments.

At the end of the day, any trading is risky and you are likely to lose money if you haven't got a sound strategy, incorporating strict money management etc.


For all the reasons stated in the original post, my belief is that fx often travels in sustained moves, more so than many other instruments I have observed and therefore there is good profit potential.

You need to be aware of when spikes potentially may occur, and either stay out or incorporate them in to your strategy. Again, that could be said of other markets also.

I think the main reason FX has a high risk perception is the huge margin available for only very small accounts. Inexperienced traders (which this is likely to attract) will no doubt lose their money faster than it took them to open their account! (as they do not adhere to sensible money management techniques given the temptation of huge margin)

This aside, looking at the way the fx market moves generally, I see it as less volatile (choppy), and with more sustained moves than many other markets.

More risky to trade? Not in my opinion.

 

[waverider]

Hi Buk. Thanks for a very useful description of how you trade. Can you just clarify for me:

1. when you refer to 'half prime', which levels exactly are you referring to on your charts?
2. what do you trade and at what spread? I spreadbet and found the spreads too wide for trading the indices like this when you are not 'skilled' at spotting the promising moves (very simply, my losing trades exceeded my winners!). The tighter spreads on forex make this type of trading more feasible (imo).
3. Would you say the essence of your trading is capturing the (fairly) predicatable bounces?...and using scaling in/out to ensure the likelihood of at least some profit on the full trade?
4. It looks as though you use MA crossovers for entries - if so, which ones?

WR

 

[Buk]

1) = the 50 level waverider (7550/7650 etc...) it's often a common consolidation area, along with the 00's. If price sets up around this level with confirmers (Fibs/Pivot/prev s&r) it strengthens potential entry/exit clips.

2) I trade off brokers (3 pip) & sb also 3 pip.....not to everyone's taste, but I don't have any probs with EITHER platform

3) I trade primarily off the round number/half century levels. It's a discretionary strat, based around price formations off s&r levels. I look for the prevailing trend & observe the larger frames (with fibs) looking for common areas of trade opportunities. The daily pivot is noted as a confirmatory tool.

4) I sling up 20 & 5 wma's on the 1 & 5, with the 100 on all time frames. I don't use them for entry/exit as such, but they do (coincidentally ) signal trades off areas I look for!!...funny that

I try keep it as simple as can be mate, sit & wait for price to set up off the usual candle confirmers (doji's/spinning tops/hammers etc...) and combine them with key (common) patterns (1-2-3's - 2b's - breakouts off ranges).....the buses are quite regular on this instrument, all ya have to do is hop on the right one!!......one or two common/regular set ups with confirming signals will serve you well..............long as you sit & wait

 

[waverider]

Excellent Buk, thanks. It took me three years to learn that most important key, which you left to last '...as long as you sit & wait'. One of the hardest lessons to learn. Also known as 'wait until the market speaks to you'.

Would you mind just outlining how you calculate the daily pivot(s)? Someone gave me a program which works out several pivot-related levels for indices but I don't know what times you would use for ohlc etc on forex....and I'd like to know the calculation anyway. Thanks

WR

 

[Buk]

no probs mate......I use the main pivot only as a guide/confirmer, and I calc it from the 22.00 (U.K) close....some folks use an hour or so each way, but that's the time frame I take it from

http://www.stelaronline.com/resource/pivot.htm

 

[donaldduke]

ps.

would you consider the fact that forex trading is available with a 1% margin requirment, as being another factor as to why forex trading can be classified as high risk - as a trader can easily find themselves out of their depth?

or

Should the 1% margin requirement not be associated strongly with risk - because if a trader is able to exercise sound money management techniques - 1% margin trading should not be an issue?

The public perception is that a volatile instrument is riskier (stocks,futures,currencies) than a
less volatile instrument (real-estate). The question of leverage comes into the equation
too, so futures are considered more risky than stocks. However real-estate which is
the most highly leveraged instrument of them all (you dont have to put any margin down on
that one) is the exception to the rule and is still considered less risky.

However traders define risk by how much they can lose on a trade.
So risking 2% of total equity in a slow market is more riskier than 1% of equity in a fast
market.

 

[Roberto]

I suspect that the perception of "high risk" is partly connected with less experienced forex traders not calculating their position-sizing correctly to allow (within their 1% or whatever it is) for the probability of some sort of spike hitting their stop-loss.

 

[Buk]

waverider : another typical/common set up.....will leave it for now, as this is off topic, didn't take this myself (busy with other things)....but they set up continually - just wait for em

sliding around at this juncture, so may not make tgt - but still offering a nice 25-30 pip move! (more if you took the earlier entry)

edit : to be honest, it's a tad scrappy as an example, but I think you get the drift!

 

[waverider]

Very useful - thanks Buk

 

[henry766]

surely any risk is directly related to volatility and gearing , i suspect fx is considered more risky rather like some fitures contracts because it's a speculative rather than an investing mkt ( like stocks and shares bonds perhaps), i.e. fx is a zero sum game as an investment unles you get direction right , stocks are actually a very good investment in long run simply buying and holding!!!

 

[DESKPRO]

.


3) I trade primarily off the round number/half century levels. It's a discretionary strat, based around price formations off s&r levels. I look for the prevailing trend & observe the larger frames (with fibs) looking for common areas of trade opportunities. The daily pivot is noted as a confirmatory tool.

Interesting I have been looking at the £/$ for the past few days and noticed how the century numbers appear to be significant to this pair in that it is more prone than EUR/$ to breakout through these numbers. Not sure how representative this week has been for that... do you mind if I ask how long you have been using this and how this system has performed?

 

[henry766]

true, what i said not strictly true , but i did add the proviso that it was an investment if you got the direction right , and even if not i dare say there are ways to "invest" in currencies , but broadly speaking i stand by what i said as to why it's percieved as "more risky".

 

[henry766]

the case for the defence rests... malud!!!

 

[Buk]

Interesting I have been looking at the £/$ for the past few days and noticed how the century numbers appear to be significant to this pair in that it is more prone than EUR/$ to breakout through these numbers. Not sure how representative this week has been for that... do you mind if I ask how long you have been using this and how this system has performed?

GJ has explained the significance & reasonings behind the consistancy of trading around 'the figure' and, as usual, is spot on regards the characteristics of price (Cable) when approaching these levels

the 20/80 numbers played out quite well as entry/exit scales leading up to year end - but, as has been commented upon, these (round numbers) are psychological levels - and as such will always have a bearing on reactive moves due to the mass participation and accompanying agenda's of the players.

to directly answer your question DESKPRO, it's always been a central role within the strat, and will continue to be so. The fact that it's a discretionary strat & NOT a hard & fast 'system' based tool, means each trading day/situation is judged on it's immediate merits as to entry/exit.

 

[ERA]

A few points I haven't seen in this threat that I think are big pro's for Forex risk wise, particularly against traditional futures and derivatives worth mentioning:-

1) Flexibility with mini fx lots allow novice traders to get experience trading without losing their shirt, unlike futures where contracts are standardised and the pint sized contracts lack liquidity, though the e-minis are improving this.

2) Fx dealers offer some excellent realtime news/quotes/charts and platforms ALL FREE. Try and get the same set up in the futures markets with software and live datafeeds with exchange fees and it costs a bomb. So lots of smaller futures traders wing it using end of day and last trade quotes from their trade platform to make decisions. I think this is one of the big pro's for fx, YOU ALWAYS KNOW WHERE YOU ARE with regard to your position. No 15 minute delayed charts and crap like that.

3) Speed of fills there is no comparison to the traditions, some futures contracts can take all of 30 to 45 min for a fill with the trader not knowing if he is in our out.. Again the electronic contracts are making headway here.

4) Order entry offered by FX is far superior with OCO and the like though some futures brokers are starting to offer some of these functions now.

5) NO limit up down days where you can't get out of a position.

6) No surprising gap opens in the FX jumping over traders stops and some fx dealers even let you deal over the weekend like Oanda, so a FX trader can at least get out if something untoward happens over the weekend.

So all and all I think market functionality and tools provided wise FX has a lot going for it to improve a traders risk exposure.

 

[roberk]

A
3) Speed of fills there is no comparison to the traditions, some futures contracts can take all of 30 to 45 min for a fill with the trader not knowing if he is in our out.. Again the electronic contracts are making headway here.

4) Order entry offered by FX is far superior with OCO and the like though some futures brokers are starting to offer some of these functions now.

.

3.have you ever traded Futures? The speed of fill is instantaneous on Globex(ok it takes 160ms because I live in japan.) Forex is so slow it is embarrasing - and I have accounts with several shops.

4.）Every platform I have used on futures offers OCO and even the cheap ones like Button trader or Ninja trader are incomparably superior to anything out in forex shop land.