Bites Of Trading Knowledge For New TOP Traders #9 (short read)
Bites Of Trading Knowledge For New TOP Traders #9
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What is Hedging? -
Hedging is the action taken through the use of a financial instrument to minimize the loss or risk of the loss of value of an asset due to adverse asset price movements.
Who are Hedgers? -
Hedgers are market participants such as commodity producers who want to lock in selling prices of commodities they produce, or food manufacturers who want to lock in buying prices of raw materials purchased.
Market participants also include financial institutions handling financial assets and use derivative products such as futures to manage the risk of a portfolio of financial assets.
What is the difference between Physically Delivered vs Cash Settled Futures Contracts? -
Physical delivery is a term in a futures contract which requires the actual underlying asset to be “physically delivered” upon the specified delivery date, rather than being traded out with an offsetting contract.
Cash settled futures on the other hand allows for the net cash amount to be paid or received on the settlement date of the futures contract.
Futures exchanges may offer both types of contracts to market participants who have different purposes for trading futures contracts.
RISKS AND OPPORTUNITIES FOR CORPORATES AND INDIVIDUAL INVESTORS -
Common application of financial market instruments for managing risk and opportunities.
Risk management is the responsibility of market participants designed to limit risk exposures that specifically applies to the participants financial profile in the market.
The financial profile of a participant may include their role in the financial market or the amount of capital under their responsibility to be managed in the market, and therefore the risk variables that each would need to identify may be unique.
For both corporate and individual investors, the market to trade would be a key variable to clearly state and support with reasons for trading or investing. Reasons for selecting one market over another could include price volatility, liquidity, daily volume traded, size of the minimum price increment, and value of the minimum price increment. Comparing these variables between markets will help decide the suitability and/or risk of each.
For example, if Mini-Brent Crude Oil futures (BM) moves around $2.00 per day (or 2 points) and a point is worth $100, a trader might experience a $200 fluctuation in their account balance for one day. Another example is the U.S Dollar / Singapore Dollar (USDSGD), which could move 70 pips or more per day and trading a standard lot size with each pip worth $10, a $700 fluctuation could be expected for one day.
Market participants may also manage their risk through the size of their positions. The larger their position size, the greater is their exposure and the smaller their position size their exposure is lower. Investors should determine the risk that would result from various position sizes and select the size that ensures that their risk limit is not exceeded.
Finally, setting stops with a specified loss amount provides protection if the market does not move in the desired direction. It helps to prevent creating a loss scenario which is larger than an account can handle.
TRADDICTIV · Research Team
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Disclaimer:
We do not provide investment advice, nor provide any personalized investment recommendations and/or advice in making a decision to trade. Before you start trading, please make sure you have considered your entire financial situation, including financial commitments and you understand that trading is highly speculative and that you could sustain significant losses.
---------------------------------------------------------------
What is Hedging? -
Hedging is the action taken through the use of a financial instrument to minimize the loss or risk of the loss of value of an asset due to adverse asset price movements.
Who are Hedgers? -
Hedgers are market participants such as commodity producers who want to lock in selling prices of commodities they produce, or food manufacturers who want to lock in buying prices of raw materials purchased.
Market participants also include financial institutions handling financial assets and use derivative products such as futures to manage the risk of a portfolio of financial assets.
What is the difference between Physically Delivered vs Cash Settled Futures Contracts? -
Physical delivery is a term in a futures contract which requires the actual underlying asset to be “physically delivered” upon the specified delivery date, rather than being traded out with an offsetting contract.
Cash settled futures on the other hand allows for the net cash amount to be paid or received on the settlement date of the futures contract.
Futures exchanges may offer both types of contracts to market participants who have different purposes for trading futures contracts.
RISKS AND OPPORTUNITIES FOR CORPORATES AND INDIVIDUAL INVESTORS -
Common application of financial market instruments for managing risk and opportunities.
Risk management is the responsibility of market participants designed to limit risk exposures that specifically applies to the participants financial profile in the market.
The financial profile of a participant may include their role in the financial market or the amount of capital under their responsibility to be managed in the market, and therefore the risk variables that each would need to identify may be unique.
For both corporate and individual investors, the market to trade would be a key variable to clearly state and support with reasons for trading or investing. Reasons for selecting one market over another could include price volatility, liquidity, daily volume traded, size of the minimum price increment, and value of the minimum price increment. Comparing these variables between markets will help decide the suitability and/or risk of each.
For example, if Mini-Brent Crude Oil futures (BM) moves around $2.00 per day (or 2 points) and a point is worth $100, a trader might experience a $200 fluctuation in their account balance for one day. Another example is the U.S Dollar / Singapore Dollar (USDSGD), which could move 70 pips or more per day and trading a standard lot size with each pip worth $10, a $700 fluctuation could be expected for one day.
Market participants may also manage their risk through the size of their positions. The larger their position size, the greater is their exposure and the smaller their position size their exposure is lower. Investors should determine the risk that would result from various position sizes and select the size that ensures that their risk limit is not exceeded.
Finally, setting stops with a specified loss amount provides protection if the market does not move in the desired direction. It helps to prevent creating a loss scenario which is larger than an account can handle.
TRADDICTIV · Research Team
--------
Disclaimer:
We do not provide investment advice, nor provide any personalized investment recommendations and/or advice in making a decision to trade. Before you start trading, please make sure you have considered your entire financial situation, including financial commitments and you understand that trading is highly speculative and that you could sustain significant losses.
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