How to manage your risk

Risk Management
Once you have the facts it is decision time. You can choose to do nothing or seek to reduce the
exposures or to hedge them in whole or in part. The unforgivable sins are to fail to consider the
risks or fail to act on any decisions.
The risk culture of your business is critical and must be established at the most senior level. Above
all it calls for honesty. Too often individuals are criticized for decisions that, at the time, were in
tune with the organization’s perceived appetite for risk. But it is never easy to set down effective
guidelines and the range of exposures for even a simple transaction can be extensive.


While losses are likely to be quantitative, the potentially infinite number of risk combinations
means that the skills needed to make good decisions are usually qualitative. Even a computer
programmed to consider every conceivable permutation of risks needs to be told what level of
exposure is acceptable. Any program is only as good as the parameters and data fed into it by
people who have themselves been conditioned by experience.

ASK Your self

1.Can the risks to your business be identified what forms do they take and are they clearly understood - particularly if you have a portfolio of activities?

2. Do you grade the risks faced by your business in a structured way?
3. Are decisions made on the basis of reliable and timely information?
4.Do you know the maximum potential liability of each exposure?
5.Over what time periods do the risks exist?
6. Are the exposures one-off or are they recurring?
7. Have trading and risk-management functions or decisions been adequately separated

Risk and Reward


Traders have no business trading if risk/reward analysis is not at the top of their concerns. If a
trader has no idea of the potential profit return on any given trade relative to the initial risk of
taking the trade at all, his long-term profitability is in question.
Of course, for every trader, the best case scenario would be to minimize the first and maximize the
second. But how do you get a handle on the potential reward in any investment and the risk you
might be taking on?
Technical analysis – what’s popularly called charting – can help traders evaluate both risk and
reward. The technical indicators used to read the charts will give you the simplest kind of picture
you can get of a currency’s performance.
Simply by placing your support and resistance and by looking at the past performance of a currency
you can get a record of its closing price over time. Once all of the elements are in place for an
analysis, you can calculate your pips difference and verify, depending on the trend of the market,
if you will make more profit or loss and if it is after all worth the position.
For example, if the market is in a bullish situation, you need to have a higher pips difference
between your buy-stop order and your resistance price than between your support price and your
buy-stop order so that your reward will be maximize and your risk will be minimize.
In each case, upside (bullish) or downside (bearish), the tools of technical analysis will tell you
important things about risk and reward. Don’t trade without them.