Insurance and Credit

One of the best things about being a global macro trader is that of being able to profit when things go crazy. Put another way global macro traders live for events that are covered in risk. If there is no risk then there is likely no reward. Of course blindly taking risks is a road to guaranteed ruin.

The first risk management tool that all traders, but especially global macro trader should use is that of position sizing. If you have not heard of position sizing then you are likely taking on more risk then you really should be. Some of the inputs for your position sizing algorithm would be things like probability of the trade working out, the maximum percent at risk in a portfolio, and other similar factors.

Now that you have your position sizing algorithm it is time to focus on eliminating or at least minimizing tail risk events. Tail risks are for very improbable events that most investors never even look at or consider. Any stock can go to zero. Your CEO might be committing fraud. Your town could experience a huge earthquake. These and countless other events are considered tail risk events.

So one thing that is important is to consider tail risk. Tail risk is essentially risk that is always present and that is highly unlikely but not impossible. CEO fraud, natural disasters, terrorism, and the like are all events that would be considered tail risks. One of the fastest ways to cut off tail risk it to be a buyer of options. Whether you use calls or puts obviously depends upon the position but you can use options to better structure your risk and therefore have better risk management.

You can use option to cut off your tail risk because options have very symmetrical payoffs. If you are long a call or a put then you can only lose the money that you have put in but your payout can be many multiples of what you put in.

Just like any other trading strategy or security there are still risks. In fact there are two primary risks when using an options strategy overlay. The first risk is that you want to ensure that you are paying a decent price and not overpaying for your options. If volatility is high you may be paying far more then they are worth and mess up your risk to reward.

Another risk is that you need to ensure that you know your trading timeframe. If you are hoping to hold the position for several years then you will likely want to reconsider options. If on the other hand you are hoping to hold it for a few day up to a year or so then options may very well be your holy grail.

Ensure that in your trading you are doing everything possible to maximize your risk to reward ratio by paying the majority of the attention the risk management segment of trading. Are you trading for fun or praise, or are you trying to make money?

Currency prices in the forex markets are always jumping up and down. Forex markets are volatile most of the time. In the short term, you will only find noise in the intra day forex market. This makes it difficult for new day traders to know how to put a stop loss. Most of the time, prices in forex markets jump 10-20 pips for no apparent reason.

The noise in the intraday market keeps on frustrating new day traders. They constantly find their stop losses being tripped even when the rates are going in the anticipated direction.

A static 10-20 pip stop loss is an arbitrary choice many traders make. Many new traders also use Trailing Stop Loss. Place your trailing stop loss too close and you will find your stop hit too early. Place it too far and you will have to forgo potential profits if the price retraces.

Many professional forex traders do use stop loss but mostly place it on their computers hiding them from their brokers. Best way to place a stop loss is using a dynamic level.

Stop hunting is something the brokers are continuously doing. If a broker finds many stop losses at a particular price level on his price feed; he can easily trip them using a momentary blip in the price. You cant even complain. The momentary spike happened due to a sudden large transaction in the market.

Do you know this many professional forex traders only use a stop loss in their mind. They plan entry/exit for each position. Keep on monitoring it changing, the stop loss in their mind as the rate fluctuates. When they reach the desired outcome, they close the position. With experience, you will also learn to do the same.

Moving Averages, Bollinger Bands, SARs etc can be easily used as dynamic stop losses by you. It is a good way to manage your risk while letting the currency markets to do what it wants.

The more experience you will develop as a forex trader the more you are going to understand that placing fixed stop losses actually hurts more. Using fixed stop losses can hurt you more emotionally, psychologically and profit wise than help you.

You should not try to trade before or after a major economic news release. You should not try to place stop loss close to or at round numbers. And you should also not try to trade in times of thin liquidity in the currency markets.

You should understand that your broker can and will use stop hunting to take out your positions using noise in the market as an excuse. Forex trading and casinos have many things in common. You should learn how to beat the markets and the brokers only then you will become a successful forex trader.

In the stock market industry, the trade for stocks and stock options are often interchanged and many may be confused between the concepts behind these types of trades. However, what you should know is that these two have very different characteristics from each other, and using them interchangeably can be very lethal if you want to engage in the stock trading game.

Knowing the difference between these two would not only save you on making serious trading mistakes, but perhaps, you can be guided on making a smart business decision on which particular trade you would actually want to make your investments.

Stocks are shares of a company that is sold or bought by an investor. If you have a stock from a company, you have rights which may include a profit from the earnings. You also have the right to sell the stock if you do not want it anymore.

A stock option on the other hand, is not the stock or share of the company itself, but it is actually the rights for a certain stock. It actually allows you to buy and sell company stock at a set price in a certain time period. However, you do not gain the profits from the company itself.

Take note that in doing transactions for stock options, there will always be a buyer and a seller, and this may not always hold true when compared to stocks. When you sell stock options, you are actually creating a certain degree of security for the company as well as for yourself. In this way, the parties involved can make sure that money is actually made to the frequent trade that happens.

For a person or company with experience in the world of stocks, there are many different possibilities for trading and stock options. Experience in this field better prepares you for the risks involved and gives you strategies to cope with the changing market. However, someone newer to the field might not be recommended to take the same chances, given their lack of experience.

Most of the professionals would rather deal in options is because in that trade, no mastter what the unknown security, an option purchaser will not lose more than the initial price paind for the rights. So in trading options, there are less risks to the purchaser, especially the one of losing a bunch of money. It could even promise more successful gains.

But on the other hand, the seller may experience greater risks. There may be a possibility that one has to deliver or take deliveries of the stock shares. Unless the option is actually covered by a different option, then the seller may end up losing much more than the stock options original price.

If you are not very familiar about how to prevent numerous losses, then you should practice the traditional trading of stocks as it is much simpler.

If you are capable and knowledgeable in the field, the field of options trading can being you great success. Knowing the principles behind stock options can open the door to many possibilities.