We believe - based on our 20 years of money market and 10 years of trading experience - that the key to safe trading is a transparent trading system. To strengthen trust, customers need to know how their profit is generated by enabling them to monitor and verify the performance of their selected products. Real time trading can help transparency the most. Sharing only past results is not acceptable for knowledgeable customers.
Without doubt, high returns at low risk in short term are the holy grails for investors. It is challenging to create a portfolio that suits our risk-return spectrum goal. It is clear however that we need to take more risk to expect higher returns. How to determine this trade-off? International studies show that investment offerings with lower risk than the expected annual net profits are worth considering, trying, as long as other security measures are in place. The best is to either match our maximum risk tolerance with our expected return or select a product that give us the return we want at a risk level we are still comfortable with.
Formulating a trading strategy for one instrument or currency pair has high-risk. Noone can predict a sudden exchange rate movement or an unexpected political or economical event. Even automatic trading systems like robots with technical and fundamental analysis lack or rarely have uncertainty as a factor in them. A not well diversified portfolio can cause extreme financial losses within hours or even minutes. Let us just think about the Japanese yen after the tsunami in March 2011 or the move in the EUR/CHF exchange rate in January 2015.
It is well known in professional circles that one trader, one strategy products are prone to have huge losses when unexpected events occur. A trader group that is well put together and supervised can trade with much less risk. These groups can share responsibilities and good strategies to strengthen each other and minimize the risk of potential losses.
The first and most important question is whether we have solid and well documented data. A nice graph or an appealing return calculation means nothing without solid and reliable data. We should not base our financial strategy on our desire for high returns. To make a good investment decision we have to make sure that we know the details of the offering. International studies show that investment products without at least 2 years of trading track record embed high-risk for investors. The risk gradually lowers for products that have performed according to the expected and published risk-return spectrum for at least 3-5 years. We must acknowledge that trading in general comes with risk. However, experienced financial professionals can help to lower this risk for us.
Knowing in advance the maximum amount we can lose can help us make a proper investment decision. High risk high return products can make us focus on the potential return, and forget our tolerance toward risk. The capital protection system was constructed to avoid excessive financial loss. When investing, it is important to know who and how provides capital protection service. The best is if the brokerage firm or its affiliated partners provide the capital protection. This way the parties share the same interest. Information system software have long enabled brokerage firms to protect the accounts of their clients by presetting certain financial parameters. We don’t want to lose what we have already earned. Dynamic capital protection was invented to protect the principal amount of our account increased by the net profit. The idea of dynamic capital protection is to minimize the risk for the client. Good performance lowers risk and it can go to zero after 6-8 months of trading. After this period we can only lose our earned profit or a part of it.
One or two trades in a week or month are insufficient to base conclusion on. The more data we have from the past the easier it is to get to draw conclusion from.
Even a good product can experience setbacks when the market does not move as expected. When selecting a product we should evaluate its past drawdowns. Frequent drawdowns, close to the capital protection level are signs for a higher than expected risk product. Minimizing risk in modern trading is crucial. Stop orders can help to keep our investment risk in control.
Choosing the right brokerage firm is just as important as choosing the right product. It is a general concept that the bigger and the more experienced a brokerage firm is the better financial service they provide. When choosing a brokerage firm we have to evaluate our needs first. If we choose to open a managed account then the account manager will recommend a brokerage firm that sets the account up with certain financial parameters. The selected brokerage must use STP (Straight Through Processing). STP firms forward their client orders to Liquidity Providers. STP system does not use any dealing desks or client account trading analysis. In fact the “No Dealing Desk” nature makes the electronic trading of a broker an STP. Since STP allows only spread revenue for brokers they are not impacted by the loss or profit of their clients. Brokers are only interested in their clients trading as long as possible. This is how brokers can achieve a continuous revenue stream. Market Makers target average and inexperienced clients and monitor their activities. For the most part Market Makers avoid taking the trades of their clients to the foreign exchange market-. This allows them to profiteer when their clients lose. Clearly in this case there is a conflict of interest between parties. The “giving bonus to clients” strategy on the Forex market is extremely dangerous.