I believe you all know that foreign exchange trading is not protected by law in China.
China’s foreign exchange market is not open yet.
Does that mean domestic forex trading is illegal?
Not necessarily.
Today, the editor of FW Finance and Economics will explain to you, is domestic foreign exchange trading legal?
What are the risks of foreign exchange trading and what are the risk control techniques?
First of all, I want to introduce a concept to you. The foreign exchange trading we are talking about now usually refers to the foreign exchange margin trading.
At present, there is no explicit ban on foreign exchange trading in China, but there is no relevant legal protection.
This means that the government does not explicitly prohibit foreign exchange trading, and there is no formal foreign exchange regulation, so the funds of foreign exchange traders are not protected.
But it doesn’t mean domestic forex trading is illegal.
So domestic investors are allowed to trade foreign exchange.
However, domestic foreign exchange trading companies are hardly subject to state supervision, and domestic foreign exchange trading is not protected by national laws.
Therefore, if a trader wants to trade foreign exchange at home, he must choose a reliable foreign exchange dealer.
To choose a reliable foreign exchange dealer, we should first understand the risks of foreign exchange trading.
As a forex trader, you should understand these risks and how to monitor them.
Today, I’ll review some of the foreign exchange risks associated with the foreign exchange market and offer some trading tips on how to minimize these risks.
I. What are the risks of foreign exchange trading?
1. Margin risk The biggest function of foreign exchange leverage is to help investors expand their margin through leverage and operate more funds to obtain more returns.
However, foreign exchange brokers also have their own risk control system. If traders keep unwinding positions, when losses occur, the available margin will be lower and lower, margin call will occur. If there is no call, it is very likely that the position will be burst.
Leverage is a double-edged sword.
In the same position, the greater the leverage, the smaller the margin occupation, the more margin available, the more risk points can be resisted.
That is, with the same amount of money, you can build a larger position.
This makes it easy for traders to breed desire and greed and to ignore money management and position control in favor of heavy or full trades.
Then a small price move could lead to a margin call, forcing investors to pay more.
In volatile market conditions, excessive use of leverage will result in losses exceeding the initial investment.
2. Political risk Political and economic risk is one of the risks that traders need to take seriously.
Economic and political factors may change the investment climate in a particular country, which can create risks for currency traders.
During elections, a country may experience moments of political instability (such as fraudulent voting, corruption or scandals, or even other events such as protests or strikes), which often lead to increased volatility in the country’s exchange rate.
When there is a change of government in a country, the ideology of its inhabitants may also change due to the new political environment.
And a change in political party may also lead to new monetary and fiscal policies.
Traders can use the economic calendar to track the timing of important news events in order to better plan and develop trading strategies.
In addition, most forex brokers provide news so that traders can keep track of current events and news that may affect trading positions.
3. Exchange rate risk The simplest exchange rate risk is the exposure to the dynamic changes in currency values, especially the risk of depreciation.
Devaluation occurs when a country deliberately adjusts its currency relative to another country’s.
Devaluation is a monetary policy tool used by countries with fixed exchange rates.
Devaluation is determined by the government that issues the currency.
One of the main reasons a country’s currency depreciates is to prevent trade imbalances.
When a country’s currency depreciates, the relative price of its exports falls, making its exports more competitive in open global markets.
If a country’s currency depreciates, it may have to raise interest rates to control inflation.
Moreover, the other big foreign exchange risk associated with a country’s currency devaluation is psychological.
A falling currency can be seen as a sign of economic weakness that can endanger a country’s creditworthiness.
In some cases, a devaluation may cause other countries to devalue in response to the domino effect of the devaluation of their neighbors’ currencies.
This will only exacerbate the economic problems in global markets.
4. Interest Rate risk According to the fundamentals of economics, if a country’s interest rates rise, its currency will appreciate because the stronger the currency, the higher the return it offers and the country’s assets will attract investment inflows.
Conversely, if interest rates fall and investors start pulling out of their investments, the country’s currency will depreciate.
It is worth noting that a country’s interest rate and exchange rate are often closely related.
By monitoring interest rates carefully, you will find that many times large institutions are focused on carry trades.
In general, higher yielding currencies are in greater demand.
5. Credit risk Credit risk is the risk that a dealer or broker on a particular transaction will not be able to pay, possibly because one party defaults or goes bankrupt.
In foreign exchange trading, there is no guarantee from an exchange or clearing house.
Brokers may fail or refuse to comply with contracts in times of intense market volatility.
The goal of credit risk management is to mitigate these risks.
When trading, traders should be aware of the foreign exchange broker rules and regulations in detail.
Does the forex broker maintain an appropriate reserve to cover the trader’s losses in case something happens?
6. Operational Risk Another type of risk associated with foreign exchange trading is operational risk.
Operational risks occur in relation to the foreign exchange broker’s internal processes, systems and personnel.
Often, operational risk and management go hand in hand.
When foreign exchange brokers have strong management teams, for example, the degree of operational risk is reduced.
On the contrary, if the broker’s management is inadequate, the operational risk will increase.
As a forex trader, it is not easy to determine the operational risks you face, but you can minimize them by studying and evaluating the operations of forex brokers.
7. Broker Risk In China, foreign exchange trading needs to be operated through the platform of foreign exchange brokers.
So do your homework and find a reputable forex broker.
Some foreign exchange brokers are not regulated, so the safety of traders’ money is not guaranteed.
Some of the large foreign exchange brokers are regulated by mainstream regulators, while some smaller foreign exchange brokers choose to be regulated by offshore regulators.
One reason why some foreign exchange brokers choose to do business with offshore supervision is that brokers can significantly reduce their overall operating costs.
The cost of obtaining and maintaining a regulatory license can be prohibitive.
In addition, capital requirements set by regulators could create a barrier to entry for many brokers unable to raise the necessary capital.
In general, it is best to work with a foreign exchange broker supervised by a mainstream foreign exchange regulator.
The following table lists some of the world’s leading foreign exchange regulators.
USA: Commodity Futures Trading Commission (CFTC), National Futures Association (NFA) UK: Financial Services Regulatory Authority (FCA) Australia: Australian Securities and Investments Commission (ASIC) New Zealand: Financial Services Enterprises (FSP) Canada: Investment Industry Regulatory Organisation (IIROC) Hong Kong: Securities and Futures Commission of Hong Kong (FSC) Singapore:
Financial Regulatory Authority of Singapore (MAS) Japan: Financial Services Authority (FSA)8. Fraud risk One type of risk that a forex trader needs to be aware of is fraud risk.
Fraud was rampant in the forex industry in the early days of margin trading.
As global financial regulation has tightened in recent years, significant progress has been made in weeding out unscrupulous brokers.
To reduce the chances of working with unscrupulous brokers, traders should do their due diligence with foreign exchange brokers they want to work with.
There are many theories about investment risk, and there are more classification of investment risk.
This book divides risk into three types: operational risk, psychological risk and market risk.
Operational risk refers to the possibility of investor’s loss due to lack of knowledge or untimely response;
Psychological behavioral risk refers to the risk brought by investors’ immature investment psychology or investment behavior, which is discussed in detail in the previous section.
These two kinds of risks should be avoided as much as possible.
As for the market risk, mainly refers to the uncertainty of foreign exchange rate fluctuations.
It should be made clear that forex investment is profitable by taking on uncertainty, and completely eliminating market risk means losing the possibility of profit.
Therefore, for the market risk we have to do is: control the risk within a tolerable range;
Or avoiding unnecessary risks.
The main strategies for managing risk are as follows: 1. This is an important control trick, and markets have a useful but simple trading rule called the alligator principle: The more the prey tries to struggle, the more the alligator alligates.
Suppose a crocodile bites your foot and waits for you to struggle.
If you use your arm to try to pull your foot out, its mouth will bite both your foot and arm.
The more you struggle, the deeper you sink.
So, in case a crocodile bites your foot, remember: your only chance of survival is to sacrifice a foot.
In market terms, the principle is: Stop losing.
In fact, whether it is the stock market, currency, options trading, the importance of “stop loss” is similar.
The so-called “stop loss” is the way not to die. It can make you live without hurting your vitality, and turn passive into active, constantly looking for new hot spots.
It takes a lot of experience and skill to properly set a stop loss level. It is an artistic combination of experience and skill.
Beginners make mistakes, but they can also learn from them.
In any case, the biggest principle of stop loss is that the stop loss should be within the scope of the investor’s ability to bear the risk, beyond which there is no meaning.
There are two types of stop loss methods: ¢Ù Normal stop loss is when the reasons and conditions to buy or hold disappear, then even at a loss, to sell immediately.
The normal stop-loss method is completely based on the reasons and conditions of the original purchase, because each person buys the reasons and conditions are very different, so the normal stop-loss method can not be generalized.
Mainly includes: ¡ñ in the important support or resistance level is broken after the stop loss, the important resistance or support position has the following kinds of: the price of a long time to stay in the intensive trading area;
Price highs or lows over a longer time horizon;
The position provided by the trend line, the golden ratio, or the moving average system, etc.
¡ñ Time on the stop loss, such as the reference is time-sharing chart, is short-term trading, but a few days later there is still no expected market, judgment error should consider stop loss;
¡ñ Fundamental changes, such as a major change in a country’s monetary policy, important political and military events, etc.
(2) The main point of the loss stop loss operation is to set up the maximum loss of the capital of the entry position, generally the percentage of the occupied funds, can also be the absolute amount of the occupied funds.
Once the loss limit is reached, no matter what the price should immediately stop the loss and leave.
Using this stop loss method, we must pay attention to the following two points: ¡ñ different varieties or different operation time to use different stop loss limit;
¡ñ Set up a stop loss limit must be verified in the market with probability.
For example, in the foreign exchange market, the average fluctuation of various currencies is different every day. For large and fast-moving currencies such as yen, pound and pound, the stop loss can be set larger, such as 50-100 points.
Euro, Australian dollar and Canadian dollar, the average move is not that big, maybe 30-50 points stop is enough;
GBP/JPY crosses average 150 points, with stops of 80-120 points likely to be sufficient.
2. Return-risk ratio For each transaction, we need to determine the profit target (return) and the likely loss (risk). Only when the ratio of the two is greater than 3:1, that is, the potential profit is at least three times the likely loss, is the transaction worth doing.
3. Don’t overtrade One of the rules of being a successful investor is to keep a certain percentage of your wealth at all times to cover price fluctuations.
It is not a good idea to always put all your money into foreign exchange trading, whether it is real exchange trading, margin trading or foreign exchange options trading.
In addition, the more frightening situation is: continuous trading, so that a day without trading uncomfortable, such a state not only has a low success rate (because the funds are used to pay commission), but also easily affect the investors’ own judgment ability, disrupt the medium – and long-term investment plan.
The above is a brief introduction about the risks of foreign exchange, I hope to help you.
