Forex Management

Forex management involves evaluating the forex exchange market and the factors influencing global transactions. You do not necessarily need to be an expert in forex but you must have a grasp of the important factors that define forex trading. The first consideration companies and individuals need to look at is the forex exposure level. This is the projected cash flow and its magnitude in light of interest rates and foreign exchange rate. Factors to be considered under this are the currency portfolios, ratio of fixed versus floating interest rate, gaps in inflow and outflow and variables such as amounts and value dates.

Second, you need to study the market to determine the prevailing trend. This means following the current events of the particular countries whose currencies you plan to trade in, noting all the events that might influence the fluctuation of the exchange rates. These will have an effect on the future value of your investment.

Evaluate your risk in view of the exposure and market forecast/prediction. How much do you stand to lose in the most extreme fluctuation? This you should calculate using the possibility of the exchange rate going beyond a certain percentage or the forecast going to the negative extreme. You should also consider the risk attached to certain markets. Some countries generally have more stable currencies than others so this is something you want to factor in when choosing your trade.

Bearing all the above in mind, you can then decide how much capital to spend on a specific trade. The risk of forex trading is real and can be very high depending on the stock being traded on. How much are you willing to risk losing? Essentially, you will either gain or lose so choose a figure that will not affect your capital if you were to lose it. A reasonable amount is 5% of the total capital you are investing in the trade.

Put benchmarks in place to manage risk. The first thing you need to do is set a risk-reward ratio. Ideally, this should be in the ratio of 1:2 for you to make tangible profit. An example in this ratio is risking $1000 and making $2000. The more experience you have, the higher you can set your ratio. A ratio of 1:4 would give you good returns by market standards.

Use stop loss orders to control the level to which your losses can fall. This ensures that no matter how much the value of the investment drops, your losses do not exceed a given percentage. Activate the lock-in feature in your stop loss order, which allows you to instantly lock in any profits you make.

You can also use variants such as forwards, options and futures to reduce risk. These are bought at predetermined exchange rates and are set to last for a given period. Options and futures are used to trade on organized exchanges while forwards are agreements between two parties where future exchange rates can be negotiated and agreed upon between the parties involved. For assistance in Forex management, be sure to visit Lucror FX today.

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