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Lesson 2: Risk control in the foreign exchange market

The foreign exchange market is precarious, and its risk is mainly that there are too many variables that determine the foreign exchange price. Although the existing books on the principle of foreign exchange fluctuations can be said to be a lot of work, some study from economic theory, some from mathematical statistics, some from geometric figures, and some from the perspective of psychological and behavioral science. Research, but the volatility of the foreign exchange market still often surprises investors. All aspects of knowledge should be possessed for foreign exchange market investors and operators, and risk control awareness and plans are indispensable.

(1) Order plan

Businessmen each have their own set of know-how in the business. Some people follow the plan step by step, and some people advance and retreat by intuition. In general, neither of these two ways of doing things can be wrong. Those who do business with intuition naturally don't need to teach in books, but those who do business with plans should be patient to finish this chapter.

There are many principles and details in the plan of doing foreign exchange business. Still, suppose it comes down to the simplest element. In that case, it is nothing more than drawing up a starting point for entering and exiting any transaction, regardless of whether it is ultimately profitable. Once this starting point is determined, changes in the price level can be attributed to rising, falling, or remaining unchanged. A trading plan must develop a blueprint for entering the actual trading market. Once the price level undergoes any of the three changes mentioned above, the trader can sell or buy according to the plan.

Although many vital factors need to be considered in formulating a plan, the core question is always under what circumstances to withdraw from an already entered transaction. This includes three exit plans. First, there must be a plan to accept losses. Once the transaction fails, you should exit calmly. Second, there must be a plan to take profit; once the profit goal is reached, you can return with satisfaction. Third, there must be a plan that enables traders to withdraw from trading when they find that the market price will not change significantly for some time.

The most effective procedure to exit a transaction that has already lost money is to issue a "stop-loss order." Of course, the prerequisite for this is that the trader knows exactly how much loss he is willing to bear. If he has set an acceptable level of loss before entering the transaction, then, once the market price reaches this point put in advance, the only thing he can do is issue a "stop-loss order."

For a winning transaction, formulating the order in the marketing is not as easy as developing a plan to deal with the losing trade. There are many possibilities here.

Suppose a trader has set a profit target before entering the transaction. In that case, an obvious possibility is that once the target is reached, he will immediately issue a "limit order" to exit the trade. Another option is that the trader keeps letting profits rise until a particular price change shows signs of a loss in the direction of money. In this case, the exit plan may be set as: "Sell at the stop-loss point, or sell when the index X gives a sell signal; whichever situation occurs first, proceed in whichever method." No matter which one is used in A profit plan, the most crucial point is that traders must realize that the ultimate goal of trading is to accept profits. Unless he decides to try his luck again, he should never forget the precise boundaries of what he sees. Many successful traders understand that money is easy to make but hard to guarantee. Traders who leave their profit plans behind will eventually realize a painful truth: "A tree cannot grow into the sky."

(2) The element capital of the plan

Any plan includes some elements. The first decision to be made is how much money to use for foreign exchange. The actual amount of cash used depends on many considerations: the first is the trader's motivation. If it is just a try or play, it is better to pay less. The second is the enterprising spirit of the trader, who is willing to take many risks to make money. Another related factor is the age of the trader because it involves his family burden, health status, working years, and his family's attitude towards him in speculative business. These are not trivial factors. The essential point is that traders should not risk that the potential profitability is not commensurate with the importance of such profit to them.

Transaction selection and evaluation

To engage in foreign exchange investment, one must choose a profitable trading method. Here are some factors to be considered in trading choices.

First, we must choose a transaction selection method. There are various methods of transaction selection. Consultation, research, or following acquaintances are all methods of selecting specific transaction items. Which way is better varies from person to person? Of course, there are also some essential reference factors. For example, the process of transaction selection should have a theoretical basis. If some basic concepts contained in a particular way are unreasonable, then this method is not enough. Second, the technique of trading selection should be able to tell traders to capture market signals. Finally, this method should provide a realistic way for traders to withdraw from the transaction rather than induce traders to exhaust their capital to engage in a particular transaction.

You are tracking the number of markets. Another element of the plan is determining the number of foreign exchange futures markets to be followed and the number of transactions conducted within a certain period.

The overall goal of the business is to achieve the most significant possible benefit commensurate with the risk. As in any other risky investment, "return" is a function of the time required, and it is not only measured by the monetary gains gained. A small profit in two or three days shows that the transaction is successful. Conversely, if you have to wait two or three months for this small profit to be obtained, even if it is 100% of the profit, it may not be very cost-effective from the perspective of time.

(3) Detailed plan

Planning is so essential to the transaction's success, so it is necessary to use a hypothetical example to illustrate further.

Suppose a speculator decides to enter the foreign exchange futures market. He is going to put out $10,000 for speculation. He selected a brokerage firm and a registered representative, opened an account, and deposited the money. To be cautious, he decided to do business in pound sterling first and then enter other markets after accumulating some experience.

This was in October when the British economic recession caused the pound exchange rate to fall. But he felt that the current price of the pound had already reflected the post-recession level, and there was no reason for the cost to fall further. He also estimated that the British recession might end, speculating that the pound exchange rate might rise. The information in his hands has also indicated that the price decline has stopped, and he believes this is a signal that price increases are about to begin. So he decided to buy the pound sterling.

A further market analysis showed that he might have a small ratio between profit and loss, and the time required is very long, so he decided to take out the money as soon as possible to engage in other transactions. He intends to lose up to a thousand dollars on the pound sterling. At this time, he is more concerned about how much his trading funds may lose rather than changes in the exchange rate of the pound sterling. In the transaction memorandum column, he noted that if the price did not reach the profit target point and the "stop-loss" point before the market closed on a particular day of a month, he would clear the account and end the transaction.

In such a simple transaction, the plan details and considerations mentioned here have exceeded what many traders can do in actual transactions. Therefore, it is not difficult to understand why so many people lose money in the foreign exchange futures market.

(4) Winners and losers in the foreign exchange market

Some of the trendsetters in the foreign exchange market get rich instantly, and some go bankrupt in the blink of an eye. When winning or losing, vast sums of money changed hands, people cannot help asking, how many people can win and how many will lose? The most well-known speculative record analyst Bryer Stewart analyzed the distribution of wins and losses in the futures market. He selected 8,746 dealers for analysis. The analysis results show that 75% of speculators are losers. In this statistical sample, there are 6,598 losers and only 2,148 winners. The total loss of the loser was nearly 12 million U.S. dollars, far exceeding the total profit of the winner of 2 million U.S. dollars.

The dollar ratio of winning or losing is 6 to 1! The distribution of wins and losses also shows that wins and losses are not significant for most speculators. 84% of the winners each won no more than $1,000 during the nine years. Stewart’s research also shows that large speculators are no more successful than small speculators. Of course, as for the final result, because the sample is too small, whether the conclusion has universal significance remains to be proved.

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