Comparative Risk & Leverage Analysis
| 13 August 2011
Being able to properly use the extra leverage on an account may seem to be expensive for others because of the additional funds to maintain two (2) or more positions in the market at any given time. However, it is more important as to why such additional positions should be made is clearly vital in meeting the investors financial objectives.
Hedging positions serves as a cushion to any negative effects in price changes specially calculating the bottom line end results of a trade in the foreign exchange market. However, if and when a preliminary entry or position already finds a reasonable amount of profits made or simply achieving the target objective of the trade; then it is adviseable to cashin the profit rather than anything else which would have been taken with a limit order anyway. Pay attention particularly the New NFA regulation on the open positions on hedging on the same currency pair and the FIFO; first-in, first-out policy as most broker dealers makes their own suggestions to this matter.
When the prices results in an opposite direction to the existing position, then it is where a trading strategist would either cut the position at a loss voluntarily or the market would have triggered the stoploss order that was placed after entry levels were done. Although, there are several ways of attempting to limit losses in the market using the approved leverage provided on the account. By distributing a certain amount to be spread in additional positions may only be the best logical approach instead of cutting the loss just right after entry points. And because of the wider price swings that the market does nowadays, it is quite easy to be out of the market within a few minutes. It is a matter of choice to know what the average trading ranges or the highs and lows established by the currency that would be traded. With this information the investor / trader will be able to define risk / reward ratios and would have a pre-calculated trade plan to implement in cases where prices makes wider swings that it normally does.
In making these choices, the best approach is to monitor the relative price movements and market direction of the currency and have a comparative analysis side-by-side whether what combination of major currency pairs may serve this purpose. It is better to be well prepared at worst times and market conditions because it often takes place whenever one would not expect. As we have always said...." trading the unexpected ". Taking a postion based on an existing bias of an event or the lack of one may prove to be more favorable as against having to place an order entry on a rapidly moving market price. Avoiding a head-on collision with a rapid market would only result into re-quotes from an electronic trading platform and may not have the best price possible. It is so fast that the price difference and spreads between the bid / ask would not even be identified when the price would finally be confirmed. That is why, for most short term traders and scalpers in the market; it is very important for them to know that these market conditions occur every now and then. One fundamental and technical way of improving one's trading skill is to trade base on percentage trades which also coincides with developing a strategic trading plan based on tolerance levels of a cross trade position.
A cross trade / hedge position does not only mean a buy and sell; it also has to do with the type of currency pair that makes logical sense as far as directional movements is concerned, but also the value and amount of exposure being taken at any given time. Having to trade two(2) or more positions not only minimizes that risk but more importantly maximizing the profit potential of the currency. By being in the market specially when one already know that the outlook was right in the first place; it its the maintaining power to ride a full length of the legs that goes with the trend. Some call it trend following strategy. However, there is no such thing as a straight up or a continues straight downward market movement. Unless a heavy fundamental report is behind such movements. Timing the market, tolerance points, key price indicators and trade execution are the main composnents of a successful trading plan when properly done in the foreign exchange market.
