Every trading session is interrupted by a significant, even disturbing, number of financial events. It is therefore essential for novice traders in the foreign exchange market to keep themselves constantly updated with reliable sources of information.
Reading the financial news makes it possible, among other things, to understand the orientation of an economy and a national currency. Similarly, stock market investors can stay abreast of developments at listed companies. Those who favor this type of fundamental analysis can often base their trading and investment decisions in part on new developments, and it is important to pay equal attention to risk management.
Risk management is a great way to adapt to ever-changing market conditions where nothing is ever taken for granted. Understanding this principle from the start will reduce the stress you may feel while trading and investing. Sure, there is historical data that makes asset movements more transparent, as well as chartistic techniques that use statistics to predict and model the possible direction of a price, but what happens when the outcome is unexpected?
expect the unexpected
The secret of risk management is expecting the unexpected.
To illustrate this in more detail, consider a scenario where the UK is about to release its latest quarterly gross domestic product (GDP) results. When researching possible outcomes, you may encounter varying market consensus from rating agencies such as Moody’s, or analyst consensus gathered by news agencies such as Reuters and Dow Jones News. In addition, government agencies publish annual growth forecasts that serve as the basis for analysts’ calculations. Examples of market consensus can be viewed on our Forex Calendar, available on the Admirals website.
As you can see, there is enough information to base your decisions on trading the British pound during the UK economic growth cycle. While market expectations are the result of great expertise and the results can be accurate, it is always possible to deviate from expectations.
If the market agreed that the British economy would grow at 2% in the second quarter and the actual result is 1.95%, then that difference is enough to make investors worry about the value of the British pound. There could be a sell-off on the currency, meaning that although you expected 2% growth and opened a position for the GBP to rise accordingly, the currency fell because the actual result was lower than expected.
Determine stop loss levels
There is no doubt that the solution to this type of scenario (used before) is to always set a stop-loss level so that you are not caught off guard in the event of a sell-off when you expected the opposite. Just as there are many opinions about the outcome of a trading or investment event, there are also multiple ways to determine where to place your stop-loss levels.
Some believe that the most effective technique is to set a stop-loss level not too far from your starting point in the event of an unexpected event, the aim being to close the position as quickly as possible. leave. Another approach is to set the stop-loss based on a specific percentage that reflects your risk appetite. A third approach is to check the last support level of the instrument and set the stop loss in the same area.
Cover your position
The principle of hedging is to look at a position from different angles. Suppose the announcement of Non-Farm Payrolls (NFPs) comes tomorrow and the market expects the report to indicate strong growth in the US jobs market. It can be assumed that if actual results are in line with market expectations, the dollar could strengthen.
On the other hand, the results may be lower than expected.
Gold and the dollar are inversely correlated, meaning that when the dollar rises, the spot price of gold (in general) falls because these assets are considered safe havens and serve as international reserves. The dollar is preferred when the US economy shows signs of growth, such as a strong labor market. In this situation, a trader may decide to hedge his USD position by taking a gold position using a CFD on his Admirals trading account.
In this scenario, a hedge would be to take a long (long) position in gold and USD and put in a stop-loss on the two underlying assets. If the NFP numbers are lower than expected, the USD may fall and the position will be closed at the stop-loss level. At the same time, the price of gold may rise if traders shift their risk appetite to the precious metal, and trading may proceed as expected.
As you can see from the examples above, trading requires research and skill. At Admirals, we’ve set up an infrastructure with the learning resources, webinars, and market analysis you need to get started.
Admirals offers many educational and analytical webinars. Join our free webinars to meet and discuss with professional traders!
INFORMATION ABOUT ANALYTICAL MATERIAL:
This content does not contain and should not be construed in any way as investment advice or recommendations, an offer or an invitation to deal in financial instruments. Please note that these marketing communications are not a reliable indicator of current or future performance as conditions may change over time. Before making any investment decision, you should seek advice from independent financial advisers to ensure you fully understand the risks involved.