Foreign exchange risk management is an essential part of successful forex option trading. Certain forex option trading strategies allow for highly leveraged forex option transactions that magnify the need for proper foreign exchange risk management. To be a successful forex options traders you must have a good working knowledge of how to manage foreign exchange rate risk.
Foreign exchange risk management for institutions and commercials is quite comprehensive compared to the foreign exchange risk management needs of the typical retail forex investor. Institutions and commercials often have both foreign exchange interest rate risk exposure as well as price exposure. The foreign exchange rate risk management needs of institutions and commercials must be tailored to meet specific needs and, therefore, are beyond the scope of this website.
If you are a commercial investor and would like more detailed information on foreign exchange risk management, we suggest you click on the bright yellow link in the right hand column of this page and check out the extensive risk management section of their website. However, as this site is geared more to the retail forex investor, we will focus mainly on foreign exchange risk management tools that are available to the typical retail forex investor who wants to learn more about how to properly manage forex market risk.
Proper foreign exchange risk management for retail forex traders starts with a working knowledge of forex risk management tools and strategies that will help you to manage forex market risk. You can start to manage forex market risk by utilizing order types such as stop and limit orders that can protect you from adverse foreign exchange price moves. Learn how to use stop-losses, trailing stops, if-done, OCO and limit orders for starters. Make sure your forex broker provides you with a list of available order types including order explanations and examples. Knowing how to use protective orders is a good start and will help you better manage forex market risk.
Also, learn a few basic forex option trading strategies that will help you reduce your overall forex market risk. A forex option contract can be used as a stand-alone trading vehicle or in combination with other forex option and/or forex spot contracts to create entirely different forex trading strategies. Forex risk management and forex hedging are too often overlooked by traders who simply don’t realize how important it is to learn a few basic foreign exchange risk management strategies before investing. The information is free, so why not take advantage of it?
In addition, be sure to keep up with news, events and economic report releases that can greatly affect foreign exchange rates. To properly manage your foreign exchange risk, you absolutely must know which factors affect foreign exchange rates and how. The forex market is volatile and rates can change in the blink of an eye – and the investors who do their homework are typically the ones who take the money away from the investors who don’t. Most forex brokers will provide clients with a forex calendar of events, a free news feed, free trading resource links and free charts to analyze foreign exchange price action. Utilize them. Also, find a forex broker you are comfortable with who will take the time to answer all your forex risk management questions and will provide you with the resources you need to become a successful forex options trader.
As always, investors should always be aware of all of the risks associated with trading forex options as well as online forex option trading. We strongly suggest you read our forex risk disclosures and our disclaimer.