SPOT FOREX RISK MANAGEMENT.  The online forex trading platforms offered through CFOS/FX allow you the flexibility to enter a wide variety of order types including orders that will help you manage currency risk:

- Limit Orders.  An order to buy or sell a currency pair, which is executed when the price is breached. For example, you place an order to buy 100,000 euro at 1.0950. The platform will automatically fill your order when the offer reaches 1.0950.  Limit orders can be placed to both buy and sell.

 

- Stop Orders.  A stop order is a type of limit order that is placed to "lock in" a specified gain or loss, closing the position. Typically a risk management order used by clients to help manage their market exposure, this type of order can also be used to enter into a new position.  Stop orders can be used to both buy and sell foreign currency contracts.

 

The traditional "stop-loss" order is used by forex traders to prevent losses in excess of pre-determined acceptable risk levels.  Virtually all professional forex traders determine both their profit targets and risk levels prior to entering each and every trade.  For example, if you bought GBP/USD at 1.7480 you could enter a stop-loss order to sell at, say, 1.7460.  This would effectively limit your potential loss on the position to 20 pips if the price fell.

 

The "trailing stop" is used to lock in profits.  For example, if you bought GBP/USD at 1.7480 and the price has risen to 1.7520, giving you a profit of 40 pips, you may want to lock in a certain amount of that profit in case the price falls back down. You would simply place a stop order to sell at, say, 1.7510. This assures that if the price does drop, your position will be closed automatically with a profit of 30 pips.  If the price keeps increasing and the position becomes even more profitable, the trader may move his or her trailing stop up yet again, thereby "locking in" more profits.

 

The stop order can also be used to enter into a new position.  For example, if the EUR/USD is currently trading at 1.3200 and you believe if the market breaches an expected support-level of 1.3185 that the EUR/USD will continue to fall in price until it reaches a lower support level around, say 1.3150, then you could place a "sell-stop" order at 1.3180.  The sell-stop order will trigger an automatic order to sell at the market once the EUR/USD is 1.3180 bid, allowing you to potentially capture profits from the expected downward price movement.  Conversely, if the EUR/USD is currently trading at 1.3200 and you believe if the market breaches an expected resistance-level of 1.3225 that the EUR/USD will continue to rise in price until it reaches a higher resistance level around, say 1.3260, then you could place a "buy-stop" order at 1.3230.  The buy-stop order will trigger an automatic order to buy at the market once the EUR/USD is 1.3230 offered, allowing you to potentially capture profits from the expected upward price movement.

 

It is important to note that, by convention, "buy limit" and "sell stop" orders are entered in below the current market price.  "Sell limit" and "buy stop" orders are entered in above the current market price.

 

- GTC or GTM Orders.  "GTC" simply stands for "good-til-cancelled" and is fairly self-explanatory.  When a GTC order is placed, the order will remain in effect ("good") until it is cancelled by the trader.  "GTM" stands for "good-this-month," meaning the order placed will only be good until the last trading day of the month.  For example, if you place an order to buy 3 EUR/USD at 1.2700 "GTC," then the order will remain in effect until you cancel it.

 

- "OCO" Orders.  "OCO" stands for "one-cancels-the-other" or "order-cancels-order."  An OCO order is used when two separate orders are placed but only one fill is required by the trader.  For example, if you bought EUR/USD at 1.3240 you could then simultaneously place a sell limit order at 1.3270 and a sell-stop at 1.3220 "OCO."  You would then effectively have your profit target order in place while simultaneously protecting yourself with a stop-loss if the market moved against your position.  If one order or the other order was to get filled, then the remaining order would immediately and automatically be cancelled.  Please be aware that in fast markets, due to extreme price volatility, you may be unable to place an OCO order where one or both of your orders are too close to the market (the current price). 

 

- "If Done" Orders.  An "if done" order is placed to automatically enter a new order "if" the original order gets "done" (gets filled).  This order allows the trader freedom to work on other forex trading strategies or other business rather than having to constantly monitor the foreign exchange markets waiting for his or her original position to get filled before placing a new order.  You could use an "if done" order in the following instance: you believe the current price of GBP/USD at 1.9270 is too low, but you would like to sell if the price rises to 1.9290.  Further, you also want to protect yourself with a stop-loss believing in case the price continued to rise above and beyond your projected sell at 1.9290.  You could place a sell-limit order at 1.9290 to effectively enter the market at your price, and you could also state "if done" place a buy-stop at 1.9305 to protect yourself from prices continuing to rise and move against your position.  The net effect of your order is that "if" and when your order gets "done," then the buy-stop order would immediately and automatically be placed as protection.

 

 

*Please note:  All of the above trade examples are not actual trading recommendations.  The above examples are for informative and educational purposes only.

FOREX OPTION RISK MANAGEMENT.  The online forex option trading platform offered through CFOS/FX allows you the flexibility to enter a wide variety of order types including:

- Limit Orders.  An order to buy or sell a currency option, which is executed when the price is breached. For example, you place an order to buy 100,000 EUR/USD March 200x 1.3050 call option for a price of .0150.  The platform will automatically fill your order when the offer reaches .0150.  Limit orders can be placed to both buy and sell.

 

- Stop Orders.  A stop order is a type of limit order that is placed to "lock in" a specified gain or loss, closing the position.  Typically a risk management order used by clients to help manage their market exposure, this type of order can also be used to enter into a new position.  Stop orders can be used to both buy and sell foreign currency option contracts.

 

The traditional "stop-loss" order is used by fx option traders to prevent losses in excess of pre-determined acceptable risk levels.  Virtually all professional fx option traders determine both their profit targets and risk levels prior to entering each and every trade.  For example, if you sold 300,000 GBP/USD April 200x 1.7500 put options for a price of .0075, you could enter a stop-loss order to buy at, say, .0100.  This would effectively limit your potential loss on the position to 25 pips per contract if the option price were to rise.

 

The "trailing stop" is used to lock in profits.  For example, if you bought 300,000 GBP/USD April 200x 1.7500 call options for a price of .0075 and the price of the option has risen to .0110, giving you a profit of 35 pips per contract, you may want to lock in a certain amount of that profit in case the price falls back down. You would simply place a stop order to sell at, say, .0100. This assures that if the option price drops, your position will be closed automatically with a profit of 25 pips per contract.  If the price keeps increasing and the position becomes even more profitable, the trader may move his or her trailing stop up yet again, thereby "locking in" more profits.

 

The stop order can also be used to enter into a new position.  For example, if the EUR/USD March 200x 1.3200 call option is currently trading at .0125 and you believe if the option price breaches an expected support-level of .0100 that the EUR/USD option will continue to fall in price until it reaches a lower support level around, say .0050, then you could place a "sell-stop" order at .0095.  The sell-stop order will trigger an automatic order to sell at the market once the EUR/USD March 200x 1.3200 call option is .0095 bid, allowing you to potentially capture profits from the expected downward price movement.  Conversely, if the EUR/USD March 200x 1.3200 call option is currently trading at .0125 and you believe if the option price breaches an expected resistance-level of .0150 that the EUR/USD option will continue to rise in price until it reaches a higher resistance level around, say .0200, then you could place a "buy-stop" order at .0155.  The buy-stop order will trigger an automatic order to buy at the market once the EUR/USD March 200x 1.3200 call option is .0155 offered, allowing you to potentially capture profits from the expected upward price movement.

 

It is important to note that, by convention, "buy limit" and "sell stop" orders are entered in below the current market price.  "Sell limit" and "buy stop" orders are entered in above the current market price.

 

 

*Please note:  All of the above trade examples are not actual trading recommendations.  The above examples are for informative and educational purposes only.

 

Once you are ready for forex trading, feel free to open a free demo account and try our online forex trading platform before opening a live forex trading account - you will be supplied with virtual money to test your foreign currency trading strategies risk-free. 

 

Feel free to contact us any time if you have questions or would like more information about forex risk management.

A foreign currency hedge is placed when a trader enters the forex market with the specific intent of protecting existing or anticipated physical market exposure from an adverse move in foreign currency rates.  Both hedgers and speculators can benefit by knowing how to properly utilize a foreign currency hedge.  For example: if you are an international company with exposure to fluctuating foreign exchange rate risk, you can place a currency hedge (as protection) against potential adverse moves in the forex market that could decrease the value of your holdings.  Speculators can hedge existing forex positions against adverse price moves by utilizing combination forex spot and forex options trading strategies.

Significant changes in the international economic and political landscape have led to uncertainty regarding the direction of currency rates.  This uncertainty leads to volatility and the need for an effective vehicle to hedge the risk of adverse foreign exchange price or interest rate changes while, at the same time, effectively ensuring your future financial position.

Currency hedging is not just a simple risk management strategy, it is a process.  A number of variables must be analyzed and factored in before a proper currency hedging strategy can be implemented.  Learning how to place a foreign exchange hedge is essential to managing foreign exchange rate risk and the professionals at CFOS/FX can assist in the implementation of currency hedging programs and forex trading strategies for both individual and commercial forex traders and forex hedgers.  For more hedging information, please click on the links below.

How to Hedge Forex - A Practical Outline

21 Free Trading Strategies

CFOS/FX Forex Hedging and Consulting Services

Feel free to contact us any time if you have questions or for a free initial risk management/hedging consultation.

*Disclaimer: Foreign exchange trading, foreign exchange investments and commodity futures trading and investments are not suitable for everyone.  Forex trading and commodity futures trading carry a high level of risk and the possibility exists that you could sustain a loss of all or more of your currency trading or commodity futures trading investment.  Before you decide to trade foreign currency options, trade foreign currency spot markets or trade commodity futures you should be aware of all risks associated with currency trading and futures trading.  If you would like more information about the risks of forex trading, commodity futures trading and of online forex trading and online futures trading, please contact a CFOS/FX futures and forex broker to discuss online foreign currency trading risks and/or commodity futures trading risks in detail.