Protecting Against Big Losses In Forex Every individual hoping to make money in forex using the fluctuations of currencies should always start with the knowledge that these investments are risky and there are some statistics that indicate that a huge percentage of these investors lose money when trading forex. Consider using the tips below to minimize the losses you will have if your currency pair moves differently from the way you anticipate.
Some forex traders try to balance their currency pairs by choosing currency pairs that normally go in the same direction, that correlate positively with one another. Since currencies have different spreads, the cost the investor will pay to buy and sell different currencies, they hope to owe less in the event there is a currency drop in value that affects the two correlating currency pairs. When investors purchase negatively correlating currency pairs they hope to balance out losses in one currency pair with gains in another.
Investors use stop orders to minimize the losses they experience if one of their currency pairs drops. So if an individual investor purchases a currency pair at 1.1230, for example, the investor could include a stop order of 1.1209 which means that if the currency drops to 1.1209 then the currency pair would be sold. Theoretically in this instance when there is a drop of 21 pips, each pip representing $10, the investor's losses based on the currency change would be $210.
One of the problems associated with stop orders is that the trigger to sell occurs at the price indicated, in this case 1.1209, but the transaction may take time to go through the market. This is sometimes explained by saying that the stop order becomes a market order once it reaches the designated amount. As in all market transactions, the time between when the sell order goes through and when it is completed amounts to what's called slippage. This amount means that the actual sale price may actually be lower than the target of 1.1209, like 1.1207 or less which will increase the loss the investor experiences. In this instance 1.1209 to 1.1207 would be an additional two pips or an additional loss of $20.
Forex investors try to protect their assets is by omitting the use of leveraged dollars in their trades. Leverage is often promoted in forex because when you're dealing with small changes in currency, the ability to buy more means that your profits can be bigger. However, in addition to the leverage cost
because leverage means an investor is borrowing from the forex trader, losses are greater in the event a currency does not perform the way an investor thought it would.
Some forex investors use cascading stop orders when they place their currency pair orders. This type of stop order operates on the range between what an investor paid, rather than the price the investor paid. In the original example if a cascading stop was placed for 21 pips and the price of the investment went up to 1.1235 before dropping down to 1.1214, the 1.1214 price which is 21 pips below the new higher price would trigger the sell.
Investors in forex sometimes use more complicated options contracts to protect themselves from losses. This type of options contract is called a put option that gives the contract holder the right to sell currency at a specific price. These contracts cost additional money to investors but can be used to protect against a rapidly dropping currency. Once the currency reaches the price named in the contract, the strike price, the investor would have the option to execute the contract, and sell at the contract rate even if the currency has gone significantly lower.
Different types of orders are used by forex investors to try to protect themselves from losses. Use the tips above about the general way specific types of orders work to help protect against losses in forex. Click Here For More Information