Forex

Risk Management in Global Online Trading – 6 Strategies to Keep in Mind

Contents

Trading in global online markets involves taking various risks while targeting a potential return. To make a successful trading career, traders need to understand the risks they take and how to learn more about risk management. Risk management is an important aspect for online traders who want to have a successful experience with global markets.

One key factor to consider is that risk is a feature we experience in everyday business and investments. For example, in any business that you run in Kenya, you must take some risk to realize a return.

The nature of risks involved in global online trading involves a positive correlation with reward. That is, the higher the risk, the higher the reward and the lower the risk, the lower the reward. This implies that the traders who have more funds to risk tend to benefit more than those who have less capital to trade.

First things first, let us dissect the various risks that traders take while trading in the global online markets. Risk management is a good practice for traders worldwide in the wake of more volatile markets.

Risk management is important as money management-if you want to learn more about it, click here

Exchange rate risk

This relates to the volatility of exchange rates between various currencies. Most Kenyan traders that trade in global online markets usually begin by converting their funds from Kenya shillings (KES) to US dollar.

Even though some brokers offer KES denominated trading accounts such as Scope Markets Kenya, converting KES to USD on the spot involves accepting the risk of transacting at a higher exchange rate.

This risk can normally cost an trader between 0% and 3% on the deposit side and a similar amount on the withdrawal side. One particular advantage that offshore traders get from this is that the US dollar is vastly stronger than the KES and converting their profits back to KES when the USD is strong gives them a better return on investment. This basically converts the risk into a reward with diligent risk management practices.

Interest rate risk

When trading in currencies, there are risks that the country’s central bank may vary interest rates based on economy-centric reasons. This may, in turn, increase or lower the currency’s volatility and overnight rollover fees.

If the change favours the trader’s position, the trader may earn positive overnight rollover fees and volatility-based profits.

To properly conduct risk management against interest rate risks, traders closely follow country-specific monetary policy proceedings to understand the country’s forward policies and adjust their positions accordingly.

Traders may also hedge their positions against interest rate risk by taking carry trades. This implies buying a currency that pays a higher interest rate while selling a currency that charges a lower interest rate. For instance, if you sell the EUR/MXN currency pair, you will earn the cumulative interest rate differential every midnight.

Systemic risk

This refers to the risk that a specific company may fail and have a ripple effect on the entire market or industry. This is synonymous with the 2007/8 financial market crash, where the crash of Lehman Brothers led to the eventual collapse of the entire US stock market.

This risk is often caused by interdependencies between various companies in a financial system. A well-diversified portfolio in geographically separate stock exchanges should be any trader’s risk management strategy.

Systematic risk

This refers to the risk associated with the broader market. Traders usually cannot avoid or do proper risk management. An example is the global Covid-19 pandemic that led to economic shutdowns, travel restrictions, and disruption of supply chains.

This led to significant crashes in global stock market prices as well as commodity prices. Traders usually take this as an opportunity to buy stocks and commodities at discounted prices.

For instance, the traders that bought growth stocks at March 2020 lows have made supernormal profits by April 2021. Volkswagen stock has rallied over 330% since March 2020 lows, while Square Inc. is up over 660%.

Similar opportunities appeared in the global financial crisis of 2007/8 that was caused by the systemic risk of the collapse of Lehman Brothers.

Latency risk

This is the risk associated with the speed of your internet connection which may lead to slippage. Slippage works both ways. That is, if your internet is slow and you execute a trading position on your device, it takes a couple of microseconds before your order reaches the broker’s server, during which the market price may have changed.

If the price has changed in the direction of your trade, you lose value, and if the price has changed in the opposite direction, you gain value.

Safaricom and Airtel have launched 5G networks set to lower latency on internet speeds, thereby lowering the latency risk. Risk management here involves the traders procuring a fast internet connection with low latency for faster trade execution.

Marginal / Leverage risk

Global online brokers offer traders a facility dubbed leverage. This facility magnifies their purchasing power, enabling them to take huge positions above their account size.

When their positions move as speculated, traders enjoy magnified profits of up to 400 times. However, when the positions go against them, traders are forced to face margin calls when their initial margin gets depleted.

Risk management & Trading in these markets

Trading in global financial markets can often be advantageous, depending on the strategy used to analyze and trade these markets. Recent observations show that retail traders can make consistent profits to earn a living and thrive towards financial freedom.

Traditional entry barriers such as lack of trading education have been eliminated by forex brokers through free educational webinars. In contrast, insufficient capital has been eliminated by the use of leverage that expands the client’s purchasing power to 400 times the deposited capital.

When you compare the performance of top global stocks with the performance of top local stocks, you realize that the reward is relatively much higher on global stocks even though the inherent risks are also higher.

For instance, the best performing US company in 2020 was Tesla, with 743% gain in 2020, while the best performing company in Kenya was Carbacid Investments Plc, with a 43% gain in 2020. This wide gap in rewards is sufficient to offset the extra risk of participating in offshore trading.

When trading in global online financial markets, traders enjoy highly liquid markets, competitive prices, and swift trade execution. Traders can trade currencies and commodities 24 hours a day and 5 days a week. The transaction costs are much lower, and the high volatility presents a higher number of trading opportunities. Learning more about risk management can save up on more time, funds, and opportunities.

In addition to this, traders enjoy much-advanced technology for trading and better regulation from globally accredited organizations such as the U.S. Securities and Exchange Commission and the Cyprus Securities and Exchange Commission.

So, how do you trade in offshore companies?

First, a Kenyan trader needs to register a free account with a locally regulated broker. The Capital Markets Authority of Kenya (CMA) has licensed only four brokers in Kenya. Scope Markets Kenya is one of these licensed brokers.

Once they register, the trader needs to make sure that that broker they are using has the assets they need to trade on their trading platform. Once they verify the assets available for trading, the trader needs to invest some time in education on using the broker’s trading platform and how the markets operate. This can be done on a practice account that has virtual funds and live market prices. Brokers usually offer this education free of charge.

The Capital Markets Authority of Kenya requires that the brokers perform an extensive know your customer (KYC) process to make sure that clients do not use illegal funds or perform money laundering in their trading activity. This means that traders have to submit documents proving their proof of identity and proof of residence. Once the documents are verified, the traders are free to start trading on global financial markets.

These markets include currencies markets, global stock markets, stock market indices, commodities markets, futures contracts, Exchange Traded Funds (ETFs), and CFD stocks. The wide variety of assets and asset classes means that the traders do not lack opportunities to trade and make profits.

Additionally, the brokers offer live market analysis sessions and mentorship sessions to aid new traders in analyzing market information and identifying important price levels to make market entries and exits. These programs are held weekly to ensure traders are in a continuous process of learning and interpreting current markets events that are affecting asset prices.

What are the technologies used in trading global online markets?

When trading global online markets, traders use a secure multi-asset Metatrader 4 and Metatrader 5 platform to take positions in the markets. Some brokers offer additional mobile platforms with a simpler graphic user interface to make trading seamless for their clients. Other brokers have created a community of traders to help traders socialize and share trading ideas using telegram groups.

When it comes to trading tools, some brokers have developed risk management tools to help traders risk a particular portion of their capital. This helps traders manage their capital effectively for each trade without taking too much risk.

The Metatrader 5 trading platform allows traders to access global financial markets on a desktop computer, laptop, tablet, and/or mobile phone as long as they have an internet connection. The Metatrader 5 trading platform gives traders access to multiple order types such as market orders, pending orders, stop-loss orders, take profit orders, and trailing stop orders.

There exist third party website applications for social trading, trading performance analysis, market analysis, live market updates, technical charts analysis, and risk management that aid a trader in achieving financial trading success and consistency.

This includes the trader cast platform, trading view platform, myfxbook platform, babypips risk calculators, forex factory economic calendar platform, and the Blomberg terminal for market news.

Bottom line, the rewards present in participating in global online financial markets largely outweigh the risks involved. The technology involved gives a trader an upper hand in risk management. In contrast, the global online trading community gives a trader a wide range of perspectives to make an informed trading decision.

The results of existing traders prove that trading in global online financial markets is achievable even to participants in smaller African economies such as Kenya, Uganda, and Tanzania. To start off, retail traders can deposit KES 10,000 and begin building a portfolio with discipline and skill.

One day or day one. The choice is yours.

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