• How risk management will shape the trading in 2022.
• Risk Management isn't just about protecting your Business, your Portfolio or your trading Strategy, it's also making it better.
• Financial risk management, as opposed to “Risk Management” is used to protect against financial market exposures.
• Timing & Spreads in contract
• The exchange regulations and transparency.
• Commodities strategy.
• Transparency and regulation in Exchange
• Standardization and Market depth
When creating plan covering the most important aspects and have certain measures in place for various circumstances which arrive as part of trading, we will significantly increase the level of confidence; and ultimately this will increase the odds of achieving success and accumulating profits.
Risk Management isn't just about protecting your Business, your Portfolio or your trading Strategy, it's also making it better. Risk Management shouldn't be thought as a stand alone compliance or control activity, but as a competency that allows your organization to realize its potential, whether that means driving top line growth, eliminating costs, enhancing reputation, or making use of capital assets.
2 - Financial risk management, as opposed to “Risk Management” is used to protect against financial market exposures. Traditional risk management tries to protect against loss of physical assets through loss control programs and commercial insurance products. Firms that hold financial assets or liabilities are likely to try to protect themselves against loss in the value of the financial asset, or increases in the cost and decreases in the return (interest rate) of those assets and liabilities.
During a previous robbery, one of the thief shouted, addressing to the employees inside the bank: Do not move, the money belongs to the state and your life belongs to you. So everyone laid down on the ground .. "This is called the concept of change in mind thinking."
And when the thieves finished from collecting the money, the younger thief, who holds a university degree, addressed to his leader :
Boss, let's count how much money we took. The leader reprimanded him and said to him: No. This is a large amount of money and it takes us a long time to count it, tonight we will know from the news bulletins how much money we have stolen!! "This is called experience." Now a days, experience is more important than paper certificate.
When the whole gang members fled away, one of the employees said to the branch manager: Call the police quick, but the branch manager quickly replied : Wait let's take 10 million dollars and keep it for ourselves and add it to the 70 million dollars that we embezzled previously!!
This is called swimming with the tide and turning the situation in your favor.
The bank manager said with a tricky smile, "Then it would be great if there was a robbery every month..." This is called going too far.
The next day, news agencies all over reported that $100 million had been stolen from the bank!!
At their hidden basement, the thieves counted the money again and again, and each time they found that the amount was only 20 million dollars. So, they got very angry and said to each other we risked our lives for 20 million dollars and the bank manager in return got 80 million dollars without getting his clothes dirty. Be educated instead of being a thief. This is called knowledge whose value is in gold.
At the same time, the bank manager was showing a smiling happy face as he became a millionaire. This is called seizing the opportunity.
Who do you think is the smartest of them all? Or who is the most cunning among all of them?
All of them profited from the stolen money due to their intelligence. The thieves reminded people that the money is not theirs, but the state’s money, and therefore there is no need to obstruct them. One of the thieves waited for the news bulletin to find out the amount of stolen money, but the bank manager shocked him and announced the theft of a larger amount, because he is also smart and cunning.
They are all intelligent and have the ability to analyze and find loopholes, but they have used their intelligence to do harm, not benefit.
3- Back to topic
In addition to a program of avoiding unnecessary risk through controls, many firms attempt to minimize the necessary risks of doing business by hedging their financial risks in the financial futures markets. A company may choose to use one or all of the various derivative instruments available to them for this purpose. A derivative instrument, broadly defined, is a financial instrument that “derives” its value from the value of some commodity or financial instrument. Some of the simplest and most common forms of financial derivatives are futures, swaps and options.
4- A futures contract allows a firm to buy or sell a contract in a specific financial instrument for delivery at a future date. This would allow the company to protect against adverse rate and price movement. Example, in three months time, a company may have to finance a large order for about six months. Since they do not know what the six month interest rate will be in three months, they would consider selling a Treasury bill futures contract. If rates go up in the intervening period, the company will have to pay a higher rate, but this will be offset by the profit in buying back the T-bill contract, since rates move opposite prices. If the rate were to go down, the company would lose on the futures contract (have to pay more), but that loss would be offset by their lower interest cost. The idea is not to try to outguess the market, but to limit the risk of interest rates moving against the company. (This is experience).
5- Anyone buying or selling futures contracts should clearly understand that the Risks of any given transaction may result in a Futures Trading loss. The loss may exceed not only the amount of the initial margin but also the entire amount deposited in the account or more. Moreover, a number of steps can be taken in an effort to limit the size of possible losses.
Futures traders should, be familiar with available risk management possibilities. commodity may currently be less volatile, that prices will fluctuate in a narrower range. They should be able to evaluate and choose the futures contracts that appear--based on present information--most likely to meet your objectives and willingness to accept risk.
Now, the biggest myth in investing is that you have to take huge risks for huge returns. Contrary to popular belief, great investors always take the least amount of risk for the most amount of upside possible.
This is called asymmetry (Change in mind thinking for big reward)
6- Note that that neither past nor even present price behavior provides assurance of what will occur in the future.
Prices that have been relatively stable may become highly volatile (which is why many individuals and firms choose to hedge against unforeseeable price changes).
In futures trading, being right about the direction of prices isn't enough. it is also necessary to anticipate the timing of price changes. The reason, of course, is that an adverse price change may, in the short run, result in a greater loss than you are willing to accept in the hope of eventually being proven right in the long run.
(Whereas here you are swimming with the tide & turning the situation in your favor)
° Example: In January, you deposit initial margin of $1,500 to buy a May wheat futures contract at $3.3O--anticipating that, by spring, the price will climb to $3.50 or higher. No sooner than you buy the contract, the price drops to $3.15, a loss of $750. To avoid the risk o/a further loss, you have your broker liquidate the position. The possibility that the price may now recover--and even climb to $3.5O or above--is of no consolation.
When to buy or sell a futures contract can be as important as deciding what futures contract to buy or sell. In fact, it can be argued that timing is the key to successful futures trading.
8- Stop Orders
Stop orders are often used by futures traders in an effort to limit the amount they might lose if the futures price moves against their position.
For example, were you to purchase a crude oil futures contract at $21.00 a barrel and wished to limit your loss to $1.00 a barrel, you might place a stop order to sell an off- setting contract if the price should fall to, say, $20.00 a barrel. If and when the market reaches whatever price you specify, a stop order becomes an order to execute the desired trade at the best price immediately obtainable.
In addition to providing a way to limit losses, stop orders can also be employed to protect profits. For instance, if you have bought crude oil futures at $21.00 a barrel and the Price is now at $24.00 a barrel, you might wish to place a stop order to sell if and when the price declines to $23.00. This (again subject to the described limitations of stop orders) could protect $2.00 of your existing $3.00 profit while still allowing you to benefit from any continued increase in price. (Using your experience in the market).
Spreads involve the purchase of one futures contract and the sale of a different futures contract in the hope of profiting from a widening or narrowing of the price difference. Because gains and losses occur only as the result of a change in the price difference-- rather than as a result of a change in the overall level of futures prices--spreads are often considered more conservative and less risky than having an outright long or short futures position. (Seizing the opportunity through price differentials).
10- Futures trading requires a relatively small amount of margin. Trade sizing is mainly a matter of how much risk one wants to assume. The most important element of an investment process is how one implements the program's portfolio construction and risk management, so that one can have both smooth performance and stay in business during dramatic market moves. In derivatives trading, one has a lot of flexibility in designing an investment program.
11- Risk management is designed into investment process. The conventional asset manager approach to risk management is a useful first step in designing a risk management program for leveraged futures trading. One still needs to add several layers of risk management to this approach because of the unique statistical properties of commodity futures contracts and because of the different way futures products are marketed. A futures product typically does not have a benchmark, so the conventional asset manager approach of translating a client's guidelines into risk and return targets. Instead, one needs to determine what the acceptable total-return- to-total-risk trade-off is for a client. (Market mechanism knowledge that value in Gold).
The Fxgrow financial company/Exchange ensures the maintenance of a fair and competitive market by bringing:
- Offering access to all approved participants to a central electronic platform
- A transparent market makes the participants quickly aware of what is going on in the market (clear and sound monitoring of the market)
Founded in 2008, FxGrow is a brand name of Growell Capital, authorized and regulated by Cysec, based in Limassol and the Lebanon.
In addition to our Fintech technology company to enhance & automate our financial services & processes.
The cornerstone of our company philosophy shall be the respect of our clients and often widely varying requirements.
Our business relation ship will always be based on a through, in depth assessment and discussion of specific needs and goals.
• Speed of execution
Thanks to the electronic platform, participants can rapidly open/close their positions. The risk of slippage is minimized.
• Market Depth
The deeper the market, the faster to enter and exit the market, the easier the market will absorb big lots without moving too much.
At the end there are a number of commodity derivatives strategies, which earn returns due to assuming risk positions in a risk-adverse financial world. The returns are not necessarily due to inefficiencies in the market place. There is a very important active component to an investment program.
It is the investment program risk management methodology and policy. An investment manager must decide how much to leverage the
strategy and whether to give up any returns by hedging out some strategy’s extreme risks. That investment manager must continually monitor the risk exposures in his portfolio and make sure that those exposures adhere to pre-defined limits.
Author: Ricardo Antoine Ghosn, Market Research Analyst
Mr. Ricardo Ghosn, has joined FxGrow in 2019 and has been in the field of finance and investment since 1985. He has studied Business Computer in the Lebanese American University. His skills have been sharpened by the real experience and the exposure to various business situations over the last 30 years by promoting investment opportunities. He has been covering the global capital markets for more than 30 years, able to manage financial portfolios, dealing in the International monetary market , commodities, options & equities, as well as his experience in the dealing room management and the compliance department with the central bank. President of the financial market committee from May 2003 until April 2005. A prolific writer and speaker, He used to give lectures in the forex & futures markets, as well as writing economic articles in some magazines. His knowledge of the global market include the awareness of the current trends and financial status of the world economy Mr.Ghosn possesses analytical and interpersonal skills, dynamic, career oriented and capable of handling multi tasks. His qualities lie in the area management, operations, trading, marketing and PR. He has acquired his knowledge through his professional experience in different fields and multiple companies. He majored in business computer and started his career path by joining the first brokerage firm in 1986 and boosting his experience.