Principles of investing
We invest in the markets just to gain. From this it follows that the guiding principle of every investor should be to protect capital.
Unfortunately, most forget about it. This is what experienced traders differs from the average investor is:
First Ability to quickly cut off the losses, while the average investor often leads to the fact that they take enormous proportions.
Second Acceptance of large profits, while the average satisfied by a small profit.
Third Control risk, the risk of a single transaction is issued a small proportion (2-3%) of capital for the game on the market. Many
investors consider this as being too cautious and risking much more (10-20% and more).
4th Patient finding opportunities in the market, in the search of such transactions for which the ratio of profit / risk is at least 3:1.
The analysis is not everything
Many investors believe that just a good knowledge of technical analysis that will provide a tool to make large profits. Rarely draws
attention to aspects such as developing a system of investment transactions, money management and control of very strong
emotions. These elements are as important as good knowledge of technical analysis. Creation of a system of trading leads to the
fact that the investment process becomes more
an objective. In this way we avoid making decisions under the influence of emotions.Managing money is speaking briefly control
the size of open positions in relation to our capital, and minimize the risks associated with investing. Finally, it is very important
psychological factor.
Playing the markets with high financial leverage delivers a lot of emotion, requires great discipline and strong nerves.
Forex – not only for speculators
The possibility of achieving high rates of return on the forex market attracts many investors, who in the short term would like to earn
big money. There are investors capable within a few months multiply 5-10 times their capital, but they are quite rare.
The forex market offers many investment opportunities but also poses a significant risk of loss. On the one hand, many online
platforms offer very high leverage (1:100, 1:200, and more). With 1:100 leverage to open a position of 100 thousand. euro deposit
enough to have a hundred times smaller, amounting to one thousand euros.The average daily change of the euro in the first half of
2009 amounted to 2 cents.During the day we can count on earnings of up to 100%. On the other hand, high levels of leverage are
dangerous if we can not use them. Rarely, we realize that after the occupation of the market position could turn against us. Most
investors do not take into account the possibility of loss. Meanwhile, a series of losses occur even the best professional investors,
who for many years to keep the game on the market. The most common mistakes we make that lead to the emergence of large
losses as well as opening too large items.
Examples of transactions
● Example 1
Suppose you expect the weakening of the Polish currency against the European currency because of the likely resignation of the
government and the likelihood of early elections. In the investment account in the X-Trade Brokers investor has 20,000 PLN and the
current EUR /PLN rate is 3.9840. The investor is convinced of the validity of his “view” on the market and decides to take a chance
buying 2 lots of EUR/PLN at the rate of 3.9840.
The conclusion of this transaction means that the investor now has an open position on the growth of the EUR/PLN in
denominations of EUR 200,000. On the security of transactions will be charged an initial deposit in the amount of PLN 2 * 4000, or
8000 PLN. The investor earns for the / in the transaction, if the EUR/PLN rate will be higher than 3.9840 and loses if it is lower than
3.9840. Let therefore the state of our investment account based on hypothetical changes in the exchange market.
Day one – at the close of the day EUR/PLN rate was 3.9700.
Loss on valuation of the investor shall be: 200,000 * (3,97-3,9840) = -2,800 PLN.However, the investor decides to hold out preroll
her position and the next day.Rolling operation is automatic. The open position will be replaced by a new investor, in the same
position he will have bought 200,000 EUR/PLN 3.9840 after the course, his account will be debited the amount of swap points for
one day. Since according to Table Points Swap X-Trade Brokers swap points for a flight amounts to PLN -29, investor’s account will
be charged: 2 * 29 PLN = 58 PLN
Day Two – at the close of the day EUR / PLN rate was 3.9880.
Gain on valuation of the investor shall be: 200,000 * (3,988-3,9840) = 800 PLN. The investor, however, that the profit of PLN 800 is
insufficient for him and decides to endure this item to the next day, rolling it like the previous day. Again, his account will be charged
the amount of 58 PLN for negative swap points.
Day Three – at 14:00 there is information about the resignation of the government and early elections, the market is turbulent. At
15:15 EUR / PLN is now 4.0190.
The investor notes that this level of the course is satisfactory to him and decides to close the position by selling it at the rate of
4.0190. Investor’s profit is: 200,000 * (4,0190-3,9840) = 7’000 PLN. However, the investor has incurred costs swap points in two
days.
Thus, an investor with a net profit of the operation is carried out = 7 000 PLN-2 * 58 PLN = 6 884 PLN
Let us now assume that the investor provides for the strengthening of the Polish currency against the euro. His belief is based on
predictions that after the Gulf War, Polish companies will gain lucrative contracts to rebuild Iraq, which will contribute to improving
the economic situation in Poland.
In the investment account in the X-Trade Brokers investor has 20,000 PLN, the current EUR/PLN rate is 4.4630. The investor notes
that the EUR / PLN rate is too high and did not continue long, and therefore decides to sell 2.5 lots of EUR/PLN.
The conclusion of this transaction means that the investor now has an open position to drop the EUR/PLN in denominations of EUR
250,000, to secure the investment account of his initial deposit will be charged in amounts to 2.5 * 4000 PLN, in PLN 10,000. The
investor earns for the / in the transaction, if the EUR / PLN rate will be lower than 4.4630 and loses if it is higher than 4.4630. Again,
we will review the status of an investment account based on hypothetical changes in the market.
Day one – at the close of the EUR / PLN was 4.48
Loss on valuation of the investor shall be: 250,000 * (4,4630-4,48) =-4.250PLN. The investor decides to endure it preroll position
and the next day. Due to the fact that an investor sold the EUR / PLN, in accordance with Table X-Trade Brokers their investment
account will be considered positive for punks rolling swap positions.Investor’s account balance will increase by 2.5 * 50 PLN = 125
PLN, as the swap points for one day short position on EUR / PLN for a flight of 50 PLN.
Day Two – U.S. troops enter Baghdad, which portends a quick end to the conflict. On world markets there is euphoria, indices record
significant growth. EUR/PLN at 16:10 falls to the level of 4.3910.
The investor notes that this level of the course is satisfactory to him and decides to close the position. Investor’s profit is: 250,000 *
(4,4630-4,3910) = 18,000 PLN. In addition, the investor earned on positive points swap 125 PLN, therefore, the net profit from the
transaction is closed = 18,000 PLN + 125 PLN = 18 125 PLN.
How to manage currency risk – examples
Entities seeking to consciously manage the currency risk that arises in the course of the primary economic activity may consider
involving of both full protection of foreign exchange risk (conservative approach) and the active development of the exposure.
● Passive approach – full security
X Company signed a contract with a German company to supply parts to the production line with a value of EUR 250,000, the
realization (and payment) will be for six weeks. The prospect of upcoming elections and possible gold market turmoil has prompted
them to secure the position.
● Action
The company is purchasing 2.5 contract (each with a face value of EUR 100,000) for a course after the course EUR/PLN 3.88 zł.
Because by taking a long position in interest-bearing currency below (the euro) should still take into account the need to pay the
cost of its maintenance for a period of protection (points) effective exchange rate was 3.8920 collateral.
● Consequences
In line with previous expectations EUR/PLN rate rose after the announcement of election results reached on the payment level of
4.02 zł, therefore, to make the payments, the company had issued 1,005,000 zł. At the same time, however, closed position in the
contracts, which gave a positive result on the transaction in the amount of 32,000 zł. As a result, despite an increase EUR/PLN
more than 3.5% of the purchase price remained at the level of interest. Of course, if favorable depreciation of the exchange rate at
the date of payment would be offset by a negative result on the hedging transaction.
● A proactive approach – partial protection
A proactive approach based on the use of expectations of the entity for the future development of the market rate for the size of
the management of currency exposure. In the above example of an active approach could speak in a situation, if the company
expecting weakening of transactions made with a higher face value than the value of the hedged payments, for example, 3.5 of the
contract.
● Consequences
In comparison with the situation in which the company does not apply any kind of security risk exposure with an active approach
is reduced, while it becomes possible to benefit from growing EUR/PLN. Active approach may involve not only from remaining
exposure to currency fluctuations, but also on choosing a convenient time to make a hedge. It should be noted that this type of
approach requires not only the establishment of detailed
Proper risk management is a key factor in the success of the investment.
In particular, you should lay down rules regarding:
- The size of involvement in a given market and the amount of global exposure – in determining
limits should take into account market volatility, the correlation between exchange rates,
amount of invested capital or the market situation (how many flights I can buy / sell a given quantity of capital)
- Closing losing positions – usually on the closing losing positions should be established before making an investment (for example
loss of one position may not exceed 5% of capital). Established rules should be consistently followed.
- The use of stop loss orders defense to protect the capital against excessive losses.
- Detention of large exposures over the weekend because of the possibility of a price gap in the market.
Using a practical investment activity is a necessary stop orders, and very popular tool for risk management. Type of stop orders may
be presented as:
- Stop loss (stop loss), specifying the maximum acceptable level of losses on transactions, above which the position is closed,
- Stop defence profit (take profit), assumes the position at the time of closing the achievement of a predetermined level of profit,
- Stop the risk incurred (Drailing stop), closing the transaction, when a certain part of the related earnings will be lost,
- Stop defence break even (Break even), causing the closure of the transaction, when brought by her loss causes a decrease of
capital below its initial value.
The size limit for issuing stop orders can be determined based on:
- Volatility of the market – it allows you to adapt the level of defense to the conditions
in the marketplace through the use of appropriately chosen coefficient of variation (eg ATR-Average True Range). For periods of
high volatility level of defense is more remote from the current price. For the period of low volatility of the system reacts to small
movements of the market.
- Charts – heuristic method which assumes that stop-loss orders are set near
relevant levels of analysis charts. Significant space may include
previous market extremes (peaks and valleys), reducing the trend line or breakout of technical formations.
- Technical Indicators – position closing the transaction is concluded with the adoption by selected technical indicator specified
value. An example would be transaction closing position when prices fall below a moving average of accepted parameter.
- The size of potential losses – closing position upon a loss of a certain size.Acceptable level of loss is received before the opening
of the position, without being subject to further modifications.
Risk Management
Managing risk in the investment process is in its assumption lead to the stabilization of the portfolio growth in the implementation of
the objective of profit, which is the purpose of investment. Management here means the adoption and application in daily practice
set of rules regarding the size of open positions, the assumed risk and the markets in which the commitment is made.
Why use our consulting services
Using his experience and presence on the foreign exchange market we are pleased to offer you services in the conduct of monetary
economy. Provide us with some competence and cooperation with us will save you time and reduce costs associated with the
broader activities of the foreign exchange market. We have a team of analysts who, through their knowledge and experience are
characterized by excellent orientation to the market situation. An integral part of our services is to make decisions or to provide
reasons for managers to their adoption.
Key benefits of currency risk management:
- Eliminate or reduce the impact of exchange rate changes on income derived or incurred costs
- Improving the planning and management of liquidity and eliminate the additional financial costs
- Ability to use current favorable exchange rates to determine the value of future cash flows
How to manage currency risk
The primary objective of risk management is to stabilize the foreign exchange value of future cash flows denominated in foreign
currencies now known, defined and acceptable level for us. The approach to risk management can be divided into two concepts:
A conservative approach – involves the full protection of foreign exchange position in such a way as to exchange rate fluctuations
do not cause changes in the value of cash flows. Thus today, regardless of currency fluctuations, we can determine the value in
domestic currency receivables, future payments, or installment loan.
Active approach – the management of currency risk may take the form of active management of the currency position. In this case,
consciously decide to leave the partial or total currency exposure, in anticipation of the favorable exchange rate changes. The
security position (also full) may occur when we consider that the exchange rate is favorable for us.