Forex, with its high leverage, makes it a very profitable and risky investment tool. Fortunately for us, there are many strategies to manage your risk in Forex trading, just as there are with any other investment. One of the simplest Forex risk management tool is the use of different order types. For example, a stop-loss order can help you limit losses and a limit order can lock in profit gained. All these tools help to minimize your risks and maximizing returns in this volatile market.
The OCO Order
Beside these simple tools, there's one that is slightly more sophisticated but very powerful. That is the OCO order (One Cancels the Other). It's easy to use and can be even more effective than the simpler types in controlling risk or maximizing returns.
Suppose a currency pair such as USD/CHF is trading at 1.4625. That is, the dollar is selling for 1.4625 Swiss Francs. But, as is common in Forex trading, that exchange rate can change rapidly and by a large amount. If it were to fall to, say 1.4600 within an hour or even a day, an investor might want to issue a stop loss order at 1.4575.
That figure is low enough that a small, temporary price fluctuation won't liquidate the position at an unfavorable price. Stop orders convert to market orders and are subject to fulfillment once the stop price is reached.
If the price drops 5%, you may not want to get out. But you want to limit the potential downside loss at some point. If it dropped 20% in a day, you might wish you had gotten out after a 10% loss.
Similarly, if the price were to rise to 1.4900 you'd be delighted. But not everyone can time the market perfectly. You don't have the option of putting in an order that says 'sell when the market price is at the peak of what it would be for the next three months'. If that were to be available, who wouldn't want a piece of it?
So you have to make a reasonable bet about where the peak is. Suppose the market starts to drop back. It could be a momentary fluctuation downward, or it could be the beginning of a precipitous drop. Since you can't know which it is with certainty, you can lock in some profit by requesting a limit order.
If the market drops back to, say, 1.4725 your limit order can be executed and you realize a profit of 100 points. Not the peak, but much better than waiting any longer if the market were to continue downward.
The Advantages of OCO Order
Now for the best of both worlds. The OCO order allows an investor to request a broker to react to not just one condition, but to one of a pair of possible conditions. You place a stop order at, say 1.4575 AND a limit order at 1.4725 simultaneously. Whenever one condition is realized, the other part of the order is canceled.
In other areas of investment, this strategy is even used with different kinds of instruments. An OCO order might specify 'Buy Microsoft at $28.00, or ARCO bonds at 115.25'. Whichever occurs first determines what is actually bought, stock or bonds, and the other part of the order is simply ignored.
Something similar can be done in Forex in which an OCO order is placed to buy euros at 1.1905 or Swiss Francs at 1.4700. Which types of 'mix and match' are available varies from broker to broker, and what type of account or relationship you have with them, as well.
Using OCO orders is just one more in what should be a whole toolkit of investing techniques. But it is one of the simpler ones to learn to use effectively.
If you're a novice trader it's wise to use the trial trading software available on a Forex website and get familiar with the different order techniques. Record the results over a few week period and compare to what they would have been with straight market orders. You'll convince yourself experimentally that risk management and profit strategies actually do work. If you would like to further your investment knowledge, I would highly recommend that you read this book-
Trading for a Living by Dr A. Elder.
Quick Forex Tip #7
Like other types of investment, you must be aware of what kind of ground you are stepping into. In other words, before getting a live Forex trading account, you must be properly educated first about the background of Forex trading. You must learn how you will maximize your earning potentials as well as decrease the risk that you are into through practicing with free demo accounts. Moreover, you must have a trading system to follow and the necessary tools that will help you analyze varying conditions of the Forex market to position yourself on the profiting aspect of a certain trade. |
Quick Forex Tip #8
In Forex market alone, there are HUGE major players (such as Central banks, commercial banks and companies) partaking on the $3 trillion worth of daily turnover. With a large number of Forex players, there is really a need in switching from manual to automated Forex trading system.
There are two types of automated Forex trading system. They are:
1. Desktop-based system- all Forex-related data are stored on your desktop’s hard drive. This system is unpopular to Forex traders because all data are susceptible to computer virus contamination and other security problems. Worse, when the computer malfunctions, all essential information might be lost and cannot be retrieved (unless you have some back-up files of your own). However, it is little expensive compared to the other types of automated trading system.
2. Web-based system- the security of your Forex account and other data are provided by your web-based provider. These are hosted on secured servers. It is also convenient in the sense that there will be no software required and it is universally compatible with your Internet browser. |
Quick Forex Tip #9
Forex trading is getting more and more popular each day. Besides, who wouldn’t want to trade in the largest and the most liquid financial market in the world? Trading in Forex will certainly give you the opportunity to earn a lot of money. However, trading in this ever liquid market also has its risk. It is a fact that many people who traded in Forex lost a substantial amount of money and some of these people are seasoned traders.
This is why it is very important for you, as a beginner trader in the Forex market, to have the proper knowledge and education on how to trade in the Forex market. Firstly, there are hundreds or even thousands of available websites in the internet that offers Forex education. Some of these websites offer dummy Forex trading where you can practice trading in the Forex market using dummy money. |
