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Risk

Investors must consider their trades carefully in conjunction with their risk comfort level. When investing in off-exchange currencies, high-risk over the counter currencies and currency forwards, options associated with price volatility, you should carefully read and understand the following risk factors you are likely to encounter. We have assembled them here for your easy perusal:

  1. Trading in currencies and currency derivatives is fraught with a high degree of risk. This type of investment is not ideal for every investor; many wind up losing part or all of their financial deposit. To minimize your risk, only deposit what you know you can afford to lose.
  2. An adverse price movement may result in a total deposit loss. In fact, in these situations, you could even be subject to additional losses that exceed your deposited funds.
  3. Options trading is a zero-sum enterprise. For each dollar of profit, there is a corresponding dollar loss. Studies have shown that roughly 80% of investors who trade options wind up losing money. Familiarize yourself with the risks associated with both short and long-term options before depositing your funds.
  4. Remember that no trading system has yet been developed to achieve consistent profits. Savvy investors understand and accept that risk of loss is the foundation for profit gain. This relationship is fundamental to trade. Understand that past price performance is not always a safe guide. Additionally, investors must note that the advice of analysts, traders, and brokers, is ultimately based on opinions, however, informed and experience-based it happens to be.
  5. Some orders which are intended to limit loss (i.e. stop-limit orders) may prove ineffective depending on market conditions and price fluctuation. Investors may find it difficult to execute orders in various types of circumstances.
  6. Transaction fees, bid asks, and commissions can have adverse effects on market positions. To achieve a profitable transaction or break even, you must calculate the cost of these fees into your equation. These fees necessarily increase the risk for loss.
  7. There is not a governmental or private institution that regulates performance on open markets such as the over-the-counter currency market. There is no brokerage firm or counterparty that insures you against insolvency or loss.
  8. Because your international account transactions are made over-the-counter and off-exchange, they are not subject to the laws or regulations of your country. Foreign markets may have different regulations than what you are used to in your own nation.
  9. Substantial conflicts of interest can and often exist between you and the brokerage firm. Typically, this conflict of interest arises because the firm or brokerage stands to gain financially from your account’s increased activity. Ultimately, the clearing firm is not a fiduciary institution and has no mandate to act in your interests except in cases involving account cashiering and trade execution.
  10. Digital over-the-counter and off-exchange environments can differ from non-electronic trading arenas. The digital environment comes with its own unique reliability risks including failure of platform, software, and hardware. Loss of communications can result in loss of data and account information.
  11. Your knowledge of investment protocols and online markets is likely to increase or decrease your risk depending on where you sit on the knowledge and experience spectrum.
  12. This list does not encompass all possible risks–only some of the most commonplace one’s investors may expect to encounter at any given time. To reduce your risk, it’s best to consult with a trained financial expert who is fluent in these types of trades and environments.

Determining Risk Proportionality

Evaluating your own risk appropriateness and proportionality is essential to your financial well-being. For example, if you identify any of the following, you should take extra care when choosing to deposit and trade in volatile markets:

  • An income of less than $50,000 US.
  • A net worth of less than $100,000 US.
  • You are over the age of 55.
  • You have no previous investment experience.

Risk assessment is part of the investment process. In these particular circumstances, the risk of loss may exceed what you can reasonably support. Your inexperience, age, or income may involve a risk that is simply too high to warrant trade in currencies or options.

Volatile markets like commodities and foreign currencies are extremely dynamic and fraught with highs and lows. With such a high degree of loss potential, these types of trades are not recommended for all types of investors. If your experience has been confined to relatively conservative investing, you should study these markets carefully before investing–and carefully determine your risk loss comfort level.

We do not recommend that you deposit funds that could detract from your lifestyle or retirement program. It’s best to invest only those funds that you can afford to lose in these types of volatile markets. Yes, there is considerable profit potential; but loss is part of this game and is a frequent part of conducting trades in these markets.

Aggressive Risk Taking

Day trading and other aggressive types of trading practices are associated with high-risk strategies. With active trading, the commission charges can exceed prudent options trading. These commissions increase the risk for loss. You should expect to encounter these losses and plan accordingly before you implement your high-risk strategy. As the account holder, you are responsible for the trade activity on your account. If you employ a high-risk strategy, you should take care to review your open market positions on a daily basis.

As a quick reference, remember that you can encounter various degrees and types of risks as outlined (but not limited) to this list:

  • Interest rate risks
  • Exchange rate risks
  • Transaction risks
  • Country risks
  • Credit risks
  • Leverage risks
  • Liquidity risks
  • Risk of ruin or substantial financial loss
Remember that many global markets are associated with a high degree of risk for investors and traders. Often, traders who make just few, largely concentrated trades are more likely to lose funds than traders who make a point of distributing their trade funds over different trades in order to spread out their risk. In these situations, they tend to have a higher change for trading at a profit. There is a genuine risk in investing in these markets and we encourage clients to weigh these risks carefully. Certainly, to make a profit on these international markets requires risk but take care to determine what level of risk is appropriate for you and your available portfolio. Develop your risk mitigation strategy in conjunction with your investment strategies. In many cases, it is wise to consult a trained and experienced financial advisor who can help you make informed decisions.

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