Trading Risk Management With Forex Options
If you trade Forex and do not use risk management, sooner or later you will be out of business. No Forex trading system will do you any good without a good risk management system. For most students, learning about Forex trading and managing risk is about placing stop-loss orders on your trade, and that’s how it should be, but keep in mind that risk management is about more than just use limits. If you’ve ever encountered a forex market that was so volatile that you couldn’t hold a position for long without getting stopped, then you know there must be a more useful risk management tool like stop loss orders. in theirs they just don’t make it.
In this article, we’ll explore the basics of a relatively new tool that Forex traders can use to save their skins. This new tool is the Forex currency options contract. Euro against the dollar, but good money management practice dictates that you place a stop loss order on your trades, leaving you open to being stopped if that market becomes more volatile.
If, instead, you bought a “call option” on the EUR/USD currency pair, you would have the benefit of participating in any bullish price movement that went beyond the strike price, regardless of how much it is, and your total risk for that trade would be strictly limited because you paid a premium for that currency option contract. Your risk cannot be greater than the premium you paid for the option.
This can mean a lot to you if you really want to buy the Euro right now, but you can’t because your risk management parameters don’t allow you to enter the market due to a dearth of good places on the chart to stop. Be placed. Options themselves are simply contracts that give their owners the right, but not the obligation, to buy or sell something of value at a predetermined price for a specified period of time, regardless of the market price for that asset. These rights provide an inexpensive way to participate in a large market movement while limiting your risk to only the amount paid for the contract.
A Forex options contract entitles you to buy (or sell) a currency pair at a predetermined “strike price” until a specified date, regardless of the prevailing value of that pair at any time up to the option’s expiration date. . . If the option contract turns out to be worthless, then the holder would simply abandon the option and walk away knowing that he has no further obligations.
If, on the other hand, the currency pair in question makes a large move higher beyond the strike price, then the option will have real principal, and the holder can exercise it and receive a currency position that is “in the money.” and therefore profitable instantly. The key element of this strategy is the limited risk associated with owning the Forex options contract. Let’s say you think the euro is going to gain against the US dollar. Of course, you can go long. So, as you can see, adding currency option contracts to your trader’s toolbox for risk management purposes can lead to a better series of results and a more profitable capital curve.