The other side of trading risk

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Most people account for their trading and investment to losing monies resulted from lack of knowledge in technical analysis. Hence, may people love to pursue books and public seminars after the mystical application of certain technical strategies with the intention of making instant profits. Unfortunately, this field of skills is not enough to survive in market unless combined of fundamentals reading.

In our coaching module, we emphasised on another important skill to be essential and in fact, the elementary virtue before you could even start your trade activities. The skill of planning and devising your trading margin or capital to stomach risk factors will decide how long you can survive with market impact and then turn around within the target time frame. Such a concept is known as risk tolerance and risk capacity.

Risk tolerance refers to the range of market prices that you can stomach against each of your trade position. Risk capacity refers to how much you have allocated the capital into the trading account that you could afford to lose everything. Trading and investment have no guarantee for your winnings. The only way to do that is to minimize the risk of each and every trade without losing it overnight.

With the above control and management in risk factors, it is comparable to just any conventional business that you need to watch capital cost and profit returns based on the transaction done. Then again, risk is already the natural decay factor if you could not control the time duration to reverse into profits after laying down the capital, be it ignorantly or intelligently.

Nevertheless, there is one other hidden risk in trading especially in margin instruments under OTC markets. This is a kind of gimmick that sprawl the customers due to their own greed, ignorance and complacence. Generally, OTC refers to the direct dealing with opposite principal on a one-on-one basis without going into the central marketplace. Some examples of OTC trades can be classified as dealing with banks, money changers, trust-funds management, OTC brokers though some might request for full capitalization.

In OTC trading markets, there are various practices among different brokers. Clients have to conduct due diligence for ensuring safety of their funds and the code of business conduct by the principal broker.

In the widest category, there are two types of OTC margin brokers. The first type operates its own marketplace known as lectronic Communicating Network?(ECN). All clients?orders are placed in the market platform of the principal broker and matches among themselves. Outstanding positions may be hedged against the bigger player on certain periodic benchmark throughout the day. Usually speaking, clients have better chance to get fair prices and trade in high liquidity if the principal broker has got huge international clientele base.

The second type of broker operates via the mode of ‘Straight to Processing’ (STP) channel. All clients?orders are thrown directly into the central desk of dealing. During fast market hours or at the disadvantages of dealers, orders from a client could be rejected. In simple term, the dealer is trading against your position and has the discretion to accept or reject your order. In any case, dealers are always smart enough to honor the client orders by creating price spread for instant small profits while the client has to stomach the hidden cost!

Having explained the above operational methods of brokers, it may enlighten some intermediate traders why they tend to lose money more often in running price slippage than just improving on their skills alone.