Understanding the Forex Market

The forex market is a global market where foreign currencies are exchanged for various reasons. It is the largest and most liquid global market, open 24 hours a day.

The Forex market is the most liquid market in the world, handling over $5 trillion in transactions per day. The remarkable liquidity in the Forex Market means that prices can quickly respond to global economic news or events. Even small changes in how much people want to buy or sell can lead to significant shifts in prices causing significant price fluctuation. 

Image 1: USDJPY 30-minute chart shows price fluctuation from 21/9/2023 to 16/10/2023. (especially on 3/10/2023)

One important concept beginner traders need to be clear about is that, in the Forex Market, an open position refers to any active or ongoing trade that hasn't been closed by an opposing trade. Whether it's initiated by a buy (long position) or a sell (short position), the position stays open until there's a corresponding trade in the opposite direction. Price changes will directly affect your open positions until you close them. On the other hand, closing a position involves carrying out a security transaction that directly counteracts and cancels out an existing open position, effectively closing the initial market exposure. 

Hence, due to its liquidity and susceptibility to significant price changes, risk management in the Forex market aims to reduce losses stemming from fluctuations in exchange rates. 

Understanding the Stock Market

On the other hand, the stock market allows traders to buy and hold share units of listed companies. The trading hours of the stock market depend on the country’s time zone of the exchange where the company is listed and are typically from 8:00 a.m. to 5:00 p.m. in that particular time zone on weekdays.

Changes in individual company share prices depend on company performance, prospects, industry outlook, management style, etc. Most exchanges have set a range to control daily price volatility in the market. Additionally, there is lower liquidity compared to the forex market. Hence, price changes in the stock market are generally gradual and less significant compared to the forex market.

Image 2: MAYBANK 30-minute chart shows stable price movement from 21/9/2023 to 16/10/2023

In the Stock Market, buying a share means actually owning the share unit until you sell it. Price changes in the market will not directly affect your portfolio unless you decide to sell it, which will then incur realized profit and loss to your account value. 

Risks in the stock market are mostly related to the company’s management style and performance. Therefore, an effective risk management strategy in the stock market is to avoid non-performing companies.

Risks and its management 

Leveraging Risks

In the Forex Market, brokers allow traders to utilize high leverage, ranging from 1:20 to 1:500. This enables traders to place orders that are 20 to 500 times larger than their available capital. However, leverage is a double-edged sword; it can maximize profits but also incur significant losses if the market moves unfavorably.

Therefore, the first and foremost step for traders to manage their risks is to place orders with small lot sizes. To minimize leveraging risks, most Forex traders will place orders that are less than 0.1 lot. 

Image 3: Order box, volume setting example on VCPlus

(To know more about lot size calculation, refer to Understanding the Basics in Forex Market - Lot sizes)

Leveraging in the Stock Market is much lower compared to the Forex market. In general, traders can get leverage of up to 3 times their capital or equity values from a stock market broker. Since the leverage risks are lower, stock market traders typically place orders of more than 1 lot based on their available capital. 

Price Fluctuation Risks

As mentioned earlier, prices in the Forex Market are more susceptible to fluctuation based on economic news and events, to reduce risks linked to price fluctuation, it is highly advisable for Forex traders to always set a Stop Loss (SL) and Target Price (TP) when you open a position. With this setting in place, the system will automatically close the position when the market reaches a particular price level, helping traders prevent further losses and lock in profit.

When setting up SL & TP, remember to consider the Risk-Reward ratio as well. The common ratio is 1:1.5, meaning the potential profit has to be 1.5 times more than the potential loss.

Image 4: Order box, SL & TP setting example on VCPlus

The Stock Market typically follows a predictable market cycle and is less volatile than the Forex market. In addition, stock market traders mainly incur realized losses when they sell shares in the market. Therefore, traders in the stock market may not necessarily set a Stop Loss or Target Price.

Table summary of different risk management strategies between the Forex Market and Stock Market

In conclusion…

Trading in the Forex and Stock Markets involves different risks and strategies.

In the Forex market, where currencies are traded, things can change quickly because of global events. Forex traders need to be careful with leverage, which can amplify both profits and losses. Setting specific levels to limit losses and secure profits is crucial too.

On the other hand, the stock market, where you buy and hold share units of companies, is more stable. Risks here are often tied to how well a company is doing. Stock traders in stocks usually focus on picking strong companies to avoid losing money.

In simple terms, Forex is like a fast and dynamic river, and stock trading is more like a steady stream. In both cases, it's important to be smart about risks, using different approaches that suit each market's nature.
 

VCPlus Trading Advice:

Trading is NOT gambling. It is highly advisable NOT to place trade values that are higher than our risk appetite. 

Disclaimer

Risk management strategies may vary depending on each trader’s risk appetite. The above article is a guideline for beginners. Traders may adjust their risk management strategies along their trading journey.

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