Best Tools for FX Risk Management

Forex (FX) is a great way to boost your profits. With the right trades, you can help your business thrive, gain start-up capital, and hone your lifestyle. Nothing is without risk though, and the FX market is one of the most volatile markets out there.

This means things can move against you fast. To reduce your risk and maximise your profits, you need the right tools for foreign exchange risk management.

We have a guide to help you find what you need. Read on and reduce risk today.

Solid Knowledge of the Foreign Exchange

Okay, this one isn’t a tool exactly, but there really is no substitute for learning how the market works. You can use FX tools to help you learn the ropes and what to look for to make gains. With a bit of experience and the right tools on your side, you will have an edge over your competition.

The best tools should accentuate your skills, but you should avoid relying on tools 100%. That said the insights, profits, and risk reduction that FX tools offer to make them powerful options for smart money.

Forex Market Calendars

Economic, political, and financial calendars tell you what’s happening and when. This gives you insight into the relevant data into the moves to make depending on the current economic climate. Calendars list press release dates, business events, and economic factors that you need to look out for.

The best calendars update fast and some advice on what trades to make. You can interpret the value of an event, or the calendar can calculate it for you. Plan to succeed.

Live News Feeds and Updates

Even the best calendars miss fast news on the wire. News services like Associated Press (AP), Reuters, and Agence France-Presse (AFP) are wire services, and they collate information from reporters and press releases all over the world, leading to a massive news feed.

Wire services are the first source of economic news that could affect your FX trades. They often feed the information to newspaper outlets, live and in print, on a contractual basis. These later reports may be more in-depth, but the news wire is your source of raw news.

The amount can be overwhelming, so you either need to have skills in filtering your search results or use an FX news tool. These group reports by their relevance to you, letting you stay ahead of the rest and react to events on the fly.

Currency Correlation Trackers

A positive correlation is when two currency pairs rise and fall in tandem. Countries with close economic ties have positive FX correlation much of the time. Major pairs like GBP/USD and EUR/USD have a positive correlation much of the time.

A negative correlation means the opposite. When one pair rises, the other falls. This is useful for hedging financial risk by backing currencies both ways. Your rising pair offsets losses from the falling pair.

Correlation trackers or calculators show correlation on a plus, zero, or minus scale. The lowest negative numbers show the greatest negative correlation and vice versa with the positives.

Forwards Contracts

Forwards contracts let you set a future exchange date and rate. These use the current spot rate and interest rates to work out how much the future trade will be worth. You can use forwards to lock in a profitable rate now based on the expected market movements.

You can use forwards to offset losses – once the rate is set, it must be honoured on the exchange date – meaning you will avoid a loss if your currency pair drops before that date.

On the other hand, if your currency pair rises in value, you could have made more profit if you had waited. The loss of profit is offset by reduced risk; you didn’t gain as much, but you didn’t lose big either.

A Quick Word on Futures

Futures work the same way as forwards, but whereas forwards have customisable contracts, futures are rigid and standardised. Futures must be written at a foreign currency exchange, whereas forwards can be made independently. The contract rate and duration are controlled by the exchange centre.

Currency Options: Calls and Puts

Options look to the future like the previous 2 methods. With options, you agree to exchange currency at a future date at a set rate. You then watch the movement of currency pairs and decide what to do next.

That’s the difference. Even though you agree to exchange, you are free the change your mind; options are not obligatory like forwards and futures.

You can make two main types of options trades. These are called calls and puts.

Analyse two currencies and decide whether the base currency will rise against the quote currency. If it looks like it will, you use a call option to back the base currency as it rises.

Put options work in an opposite fashion. You expect the quote currency to rise over the base currency. You back the quote currency with a put option.


Sell Your Options to Reduce Risk Further

To lower risk further, you can sell your put or call options if the market moves against you. Another option is to trade both ways, offsetting losses with profit. You will make less, but you will protect your trading capital too!

Lower Your Risk and Raise Your Profit

We hope this guide helps you lower your risk and make the most of your FX trades. You have software tools, like calendars, to help you. There are also plenty of strategies for reducing risk, but the best option is to fuse them both with your knowledge.

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