Unforeseen Risks

 

Video Transcription:

Hey, traders. Welcome to Video 15 of the Forex Beginners Course. This is
Cory Mitchell. In this video, looking at unforeseen issues and risks when
you’re trading brought to you by InvestU.com.

So, trading is great when everything is going smoothly, but it won’t always
be that way. Your trading may fluctuate; you may have some good months and
bad months. And you have some control over that; you can change your
strategies a little bit, work on your money management. But you will face
some unforeseen challenges which you need to prepare for.

These are, as I’m going to show you, you can help prepare for them. But
you’re not going to know when they happen.

So, these risks aren’t totally unforeseen. Because we know that it’s an
eventuality. Most of these things have happened to me, trading for ten
years. I faced these issues. And it helps you…I’m going to try to help
you prepare for them because they will happen. So, they’re not totally
unforeseen, you just don’t know when they’re going to happen, so we want to
take steps to protect ourselves now before they actually occur.

So, we want to have backup plans and most of all, follow proper money
management protocols. As we’ve covered in prior videos, we never want to
risk more than 1 to 2% of our account. And we also might want to
potentially limit the amount of leverage we’re going to use. So, reasons
for this are going to become clear in a minute.

So, some personal issues you may face while you’re trading that when they
occur for the first time, are likely going to surprise you. So, you’re
trading at home, your power goes out or your computer fries or you can’t
log in to your system, something like that. If you traded for many years,
at some point, this is going to happen. I’ve worked on trading floors, I’ve
traded from home and it happens on the trading floor, it happens here.
You’re going to have a technical problem at some point.

Your Internet is going to go down, that’s another one, software crashes.
So, this is actually relatively minor; even while it’s a little shocking at
first, this is actually a relatively minor one because it only affects you.
So, if you have a phone, a cell or a home phone, you can call your broker,
cancel your orders, exit positions, etc. Your broker is still fine; it’s
just you that’s in a bit of a state of panic at the moment.

So, this one actually isn’t too bad. But you want to make sure that you
have everything laid out in case it happens. So, make sure you have a home
phone and a cell phone, preferably both.

You also want to have your broker’s phone number on your desk because you
won’t be able to access it if your Internet or computer is down. So, a lot
of people think “Oh, I just call my broker if something happens.” But if
something happens to your computer, you may not be able to get to their
website to see what their phone number is. And especially if in they’re in
a different country or different area code, you may not know what it is.
So, make sure you have that written down.

Also, you always, on any position, you want to have a stop and target out.
At least that way, you know that your risk is controlled and you’re
eventually going to get out of that trade. So, it’s really no concern if
this happens. As I said, your broker is fine; it’s just you that’s having
the issue. So, if you have a stop and a target out, eventually, those
positions are going to wind down. You’ll be fine and hopefully by that
time, you’ve resolved your issue.

A broker issue is much more serious. So, I’ve had a couple of these and it
can be quite unsettling. Just like you have had software issues, your
computer can crash, their servers sometimes crash, stuff like that. So,
these things are going to happen. Even if you have a fantastic broker who’s
been great for ten years, sometimes, you’re going to have these issues.

So, this is more serious and it can include not being able to have quotes.
So, you can log in to your platform but it’s just kind of dead. There’s no
activity there, you’re not connected. Or it can be a complete system
meltdown where you can’t even log in to your trading platform so you can’t
even see what positions are out, what orders have filled. You don’t know if
your orders have filled.

So, you don’t know if your stops and targets are going to get filled when
they have that price. Do they have things in place to actually trigger
those trades? Or are they completely knocked out? Maybe they can be in a
power outage, too, so there’s no way to know if your orders are actually
going to get out when you expect them to.

Customer service is going to be swamped. You’re not the only guy who’s
freaking out. So, don’t expect to get a hold of someone. You can send all
the e-mails you want. You’re probably going to get a generic response.
We’re looking into it. Same with on the phone, we’re looking into it. The
customer service isn’t going to be able to help you out because it affects
so many people.

The only choice here is to be prepared. So, know that this is probably
going to happen; I hope it doesn’t. But in ten years, it’s happened to me a
few times and it’s just something you’ve got to deal with. So, you deal
with it by dealing with how you trade. So, this is one of the reasons I
don’t risk more than 1% of my trades. That way, even if their servers do
happen to go down, my stop order doesn’t get filled.

If I’m risking 10% of the trade and I lose three times as much, I’ve lost
30% of my account. If I’m risking 1% on a trade, something happens, my stop
doesn’t get filled and it goes through your 4%, that’s fine. It’s not the
end of the world to me, I can make that back. 30 or 40%, that’s a big hit.
So, that’s why I always risk 1%. That way, even if my stop order doesn’t
get filled, it’s not going to be the end of the world.

You’re also going to want to reduce leverage to the lowest amount required
for your trading practices. So, ideally, this should be less than 50 to 1.
The higher the leverage, the greater your potential return. But also, your
greatest risk in times like this. Because you can have technically $1
million worth of positions out on just a few thousand bucks worth of
capital. And if those start to move against you, you’re looking at some
huge losses. So, reduce that risk or reduce that leverage down to below 50
to 1.

Have a trading journal so you know what your positions are. This will help
you sort out what happened with your positions once the issue is resolved.

So, at the end of each day, my broker sends me a table that shows all the
positions that were closed out, all my current positions and all of my
current orders. So, that lets me know all of the orders that I have out in
the market, whether they’re actual trades or just pending orders. So, that
gives me a list of everything that’s out there. Includes my stops, targets,
all that sort of stuff.

Since I don’t put out trades till the following day that is a good account
of my current state of my positions in my account up until the next trading
day. So, that is what I use as my trading journal. I also do keep notes
myself. But you are going to want to have a similar feature; maybe your
broker can send you something similar. Or you’re just going to have to
record your trades manually.

A few other things you want to be aware of, these are of less concern.
They’re just typical of the forex market. If you hold positions over the
weekend, there’s no trading between Friday night and Sunday night. That’s
Eastern Standard Time.

Traders’ perceptions can change in that time, so the price may have a big
gap between Friday’s close and Sunday’s open. So, this may result in your
stop or target getting filled at a different price than you expect. Always
risk less than 1% of your account to be sure that even if the price gaps
won’t lose much more than 1%.

Even day traders may experience price gaps when news…sorry, I should say
when news comes out. So, the same money management rule applies.

So, these gaps are simply part of the market. If you’re going to hold
through the weekend, you have to realize that you are potentially going to
get a different price than you expect on Sunday night when the market opens
again. It’s not just going to be a seamless flow from Friday to Sunday.

Slippage is when you get a different price than you expect. It can be
favorable or unfavorable. In my opinion, re-quotes are worse than slippage.
So, a re-quote is when you say “I want to take this trade” and your broker
says, they give you a pop-up window that says “The price has changed, do
you want to accept this new price?” And you have to click “Yes” or “No.”

In my opinion, that is not good. Because if you want to get into or out of
position, you want to get in or out right then. Not at some other price.
Just get out of the position. So, I would way rather take slippage than re-
quotes. Don’t use a broker that constantly re-quotes you.

Whenever possible, trade through a direct-access broker. That means that
you’re going to get whatever price the market has available to you without
them intervening in that transaction. So, those re-quotes or they
artificially marking up the spread by a whole bunch.

Weekend gaps and slippage are just part of the market. You’ll see in
forums, lots of traders complain about it, blaming their broker. No matter
who you’re with, you’re going to get weekend gaps and you’re going to get
slippage.

Here’s a big one and let’s tackle it last because the biggest trade you
ever make is depositing money with your broker. So, you might make trades
for a couple hundred bucks all day long. But you’re making one trade with
your broker by giving them $20,000, $50,000, $100,000, whatever your
account size in. So, do your research before you open an account.

Remember that forums can be helpful, but most traders lose money. So, just
because someone lost and they’re ranting online about a broker doesn’t mean
that that broker is bad.

Look for regulated brokers. If there’s any sort of bonus, do not take it.
This is probably one of the most common issues for problems down the road.
You try to withdraw and they say “Oh, but you took our bonus, so you’re
technically trading with our money.” And there’s all sorts of issues with
withdrawal.

So, just to avoid any sort of hassle, don’t take a bonus. Remember, you’re
not going to get anything for free in this life. So, if they’re offering
you a free $500 or something like that, just tell them “No thank you.”
Because it’s not really going to end up being free.

Deposit a small amount of capital first. So, several hundred dollars, for
example. Trade for a little bit, send customer service a question to see
how long it takes for them to respond.

Attempt a withdrawal. If all this goes well, if you’re happy with it,
trading conditions were good, customer service was good, you get your
withdrawal quickly, then go ahead and deposit more capital. Still, probably
not all. Let’s say your eventual goal is to deposit $10,000. You’ve
deposited several hundred dollars. Now, maybe go ahead and deposit another
couple thousand, so you have about half to a third of the capital that you
want in the account.

Go through the same process. Trade, attempt a withdrawal, maybe contact
customer service about another question. Just make something up. Your goal
here is just to kind of test them out.

If all that goes well, deposit the rest of the capital. You’re going to
have all your money in there. And at least you’ve done what you could to
research them, test them out, make sure they’re regulated. Test out their
trading conditions, test out their withdrawal, their deposits, all this
sort of stuff. Their customer service. So, at least you’ve done what you
could do to avoid any potential hassles down the road.

So, your best defense is simply risking less than 1% of trade. That way, if
any of these sort of issues happen, at least the power outages, broker
issues, stuff like that. You’re not going to be staring down a massive
loss.

Have a backup phone and a cell phone to call your broker if you have a
personal issue. Such as your computer going down, something like that. I
have a home phone, I hardly ever use it because I have a cell phone. But I
still have it just for issues like this. Cell phone service is jammed or
something like that, but you need to get a phone call out. Sometimes, the
home phone works better for that.

Have your broker’s phone number written down, have it on your trading desk.
That way, if your Internet goes down or something, you’re not scrambling to
try to find it while you have orders out.

Keep a trade journal so you know what trades you have. Ideally, have your
broker send you something each day that says…just an automatic e-mail
that sends you all your current positions and all your current orders. If
you can’t get that, then you’re going to have to ideally, manually keep
track of your trades.

Research and test out your broker in stages to make sure you’re comfortable
with everything. As I said, this is the biggest trade you ever make. So,
make sure that you’re very comfortable with that broker. Do your research,
get online, ask some traders who maybe trade with some brokers, who they
recommend. And that’s going to be your best defense against some shady
broker trying to take all your money or giving you issues down the road
when you try to withdraw your money, etc.

So, that ends our course. I hope you enjoyed it. This should give you a
good overview of what it takes to be a forex trader and get you started in
forex trading. Until next time, happy trading.

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