Forex Trading – A Little More Information on Risk

Just a couple of points that I have not spoken about.
First up is ‘risk’ and ‘correlation’. I have discussed risk per trade where I suggest no more than 2-3% per trade. Again, it is up to the individual trader on much they risk. One thing I must point out though, is the problem with correlation. This simply means that two pairs may trade generally in either the same direction at most times or in the opposite direction most times.
The most obvious and highly correlated pairs are the EUR/USD and the USD/CHF as they basically move pretty well opposite to each other under normal circumstances. So if you had bought the EUR/USD on one trade and sold the USD/CHF on another trade, risking 2% on each trade, in reality you are actually risking 4% because of the high correlation.
The EUR/JPY and GBP/JPY also can move pretty much in the same direction for a lot of the time. When you think about it, if the pairs have a common currency involved, and news comes out that affects that currency in a big way, then it doesn’t really matter what involvement the other currency has, as the market will move.
It is just something you will have to be aware of when it comes to total risk on your trades. Best way to check out how different pairs move in relation to each other, is just throw up the 1hr charts of all the pairs you are interested in trading on the one screen and see how they move over a few days, especially when news is released.
I also spoke about planned ‘news releases’ that may or may not move the markets. Today for example, as I am only trading the EUR/USD and I am only concerned about possible high impact type news, I have checked the Forex factory calendar and now know that I have to be on my toes at 7pm my time for news out of Germany, and especially alert at 10.30pm my time for 3 major items of news out of the US. Hopefully my trading will be finished by 10.30pm, so it won’t be an issue.
Now there is sometimes the case of unplanned news that may affect the Forex prices. Examples of this include terrorist attacks on US soil (Sept 11), capture of a highly sought after individual (Sadam) or even some dopey Treasurey official making an out of the blue comment during what should have been a dull and predictable speech. Lots of things can move the market when you least expect it and it does happen on a regular basis!
I have been sitting at my computer, quite aware of all news coming out, when suddenly a pair may just shoot up 50-100 pips in a minute or two. Gets the heart pumping as you quickly check all the news releases to see what has caused the blip. It may be something simple like a rumour of a planned attack in central London. It doesn’t matter if it is false, as the market will eventually correct itself.
Just be aware that news can come out unexpected and move the market, where I get back to my previous point of making sure you have some sort of physical stop in place at all times.