Friday, October 10, 2014

Trading in Foreign Exchange requires sophisticated risk management | How risk fits with algorithmic trading

The above principles of risk management are applicable to any situation, not just the trading of Foreign Exchange. However, they are particularly relevant in the world of volatile, difficult-to-predict and often counterintuitive currency pair rate movement. Here is how we at OmiCronFX address these general principles, which are quite apart from our Forex specific risk control measures which focus on not taking on too much risk and ensuring that probability is on our side at all times:

1.    We create value by attempting to make sure that losses we incur while we are waiting to ride the big moves will be small enough to allow us to remain in the market while it builds up steam to give us the profitable trends. And we must be in the market in order to meet the potential of the big moves when they occur.

2.    Risk control is part of everything we do at OmiCronFX. We are constantly seeking to anticipate when we might have taken on too much risk. This is particularly a fear when we trade multiple currency pairs. Here what started out as an element of diversification can quickly become correlation, such as when a major news event occurs.

How risk fits with algorithmic trading

3.    We never take any trading decision without considering the risk involved. This principle is built into our algorithmic routines.

4.    The software makes sure that the process is systematic and structured. The main challenge is allowing the software to go ahead and do its job in real-time without human intervention. It has been proven by simulation, so it must be allowed to proceed according to the algorithm.

5.    All our trading is based on information that we are constantly gleaning from the marketplace. This includes both Fundamental and Technical Analysis to ensure that we have probability on our side in terms of always trading with the dominant trend, or taking cognisance of when a new trend might be about to begin.

6.    Human factors are taken into account by maintaining the discipline to ensure that the software can go ahead and do its work. If a problem arises or an opportunity is seen to further reduce risk or increase profits, these must be built into the software during the regular updates and no attempt should be made to deal with them on the fly.

 All our software development is dynamic, iterative and responsive to changed circumstances in trading. Research and development is constant. This ensures that it is capable of continued assessment, improvement and enhancement.

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