In each industry, risk management talks about how to limit your exposure and how to balance losses in comparison to gains. This is what I intend to discuss in this article: how to manage risks in trading on the financials instruments.
First of all, let’s make clear the derivative instruments (CFDs): The derivative itself is a contract between two or more parties based upon the asset or assets. Its value is determined by fluctuations in the underlying asset. In our case, the underlying assets are stocks, indexes, commodities and currencies (forex).
Stocks & Indexes – Stocks are the derivative instruments of big companies listed on the stock exchange market (e.g. Apple, Coca-Cola, Microsoft), meanwhile indices represent a stock basket grouped by its performance in a certain country or an industry (NASDAQ, Dow Jones, FTSE, DAX).
Commodities – those are basic goods grouped in 3 categories: energy, cereals and metals (e.g. petroleum, natural gases, corn, cotton, coffee, sugar, wheat, gold, silver).
Forex – or foreign exchange – is the exchange of one currency for another or the conversion of one currency into another currency. Currency pairs are always showing a rapport between prices of those 2 currencies. (EUR/USD; USD/JPY; GBP/USD).
Here you can watch an animated video about all the basic concepts of capital markets necessary for trading the complex financial instruments.
We all know that the investments into those kind of instruments carry a high level of risk, up to total loss of the invested funds. The market itself is very volatile and it involves a lot of trading risks which might bring both, opportunities and loses.
Now is the question: How to choose the right side?
Well, you’ll never be 100% sure! But what you can know for sure is that you can’t risk more than you choose to. In the online trading industry, you can monitor your risks by setting trading limits. In this way, you have total control over your investments and your potential losses won’t damage your trading strategy, because you had set the limits in advance.
Pending orders – risk management techniques
In order to limit the risks, set the price ranges for your trades, so you can know for sure what is the potential winning or loss per each opened trade.
Besides that, to have your investment under control, keep an eye on the other values of your trading account, such as: Balance, Equity, Margin and Free Margin. Stay informed and develop short and medium term strategies. Make sure that you understand the specifications of each instrument you trade and don’t get ruled by emotions – the market creates opportunities and it can turn into your ally!
Article author: Adrian Mazilu -trade.Berry founding member
Article co-writer: Renata Cheptene