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Wealth Management

UNDERSTANDING THE RISKS INVOLVED IN TRADING FOREX

The foreign exchange market attracts numerous traders every day because penetrating the market is easy. To venture into trading forex, you only need some capital, a computer, and a reliable internet connection. You will also need a basic understanding of the forex trading industry.

While trading with a forex MetaTrader trading platform is easy, it comes with various risks. As a foreign exchange trader, the risk is interpreted as a loss of money. Read on to understand these risks.

 

The Market Risk

Market risk or systematic risk affects the whole market, unlike the unsystematic risk that influences a certain market, asset, geographical region, or sector. While unsystematic risk can be reduced with the change, systematic risk cannot.

Market risk in the foreign trading market is affiliated with anything that can affect the financial value of your preferred currency pairs. Market risk is the most essential for a trader that is the type of risk that you want to be exposed to.

To make profits in the forex market you want prices to fluctuate so that you can leverage the price difference when selling or buying. This process is called market volatility.

Volatility is the element that allows traders to open profitable trades. It is a risk seeing that you might lose money should the markets go against your expectations. However, volatility can also help you open winning trades. Numerous systematic risks can influence prices. These include:

Growth, inflation, and employment figures, as they can affect Central Bank resolutions regarding monetary policy, such as interest rates.

  • Political events such as elections
  • Economic and financial announcements
  • Changes in legislation, regulations, and tax policy
  • Geopolitical conflicts, strikes, terrorist attacks, wars, and natural disasters

 

Liquidity risk

Liquidity means that a market opens and closes your trading positions fast and easily at your expected price. The reason for this is that there are numerous sellers and buyers in the market today. While the foreign exchange market is among the most liquid financial markets across the globe, there are some low liquidity periods.

Often, these occur outside the European and American trading sessions, or during the weekends or holidays. Every trader should understand the low liquidity risk, especially because it can increase the cost of trading.

·Consider the spreads

Low liquidity often causes an increase in the size of spreads. A spread is the difference between the buying price and the selling price. It is the commission a trader pays to the broker to enjoy his services.

An increase in trading costs is an occurrence that happens if a broker provides variable spreads that change based on the trading and market conditions. Some brokers may offer fixed spreads, especially if you understand the behavior of a particular currency pair.

You may also receive fixed spreads if you plan to use an active and hostile trading method like scalping amid news releases.

 

Counterparty risk

The counterparty in the foreign exchange market is the body with which a trader launches and closes trading positions. That is your broker. The risk you are likely to face here is a situation where the counterparty does not pay you due to:

  • Poor enforcement of regulations
  • Bankruptcy

Measuring the counterparty risk is a difficult task for an individual trader which is why they depend on regulatory entities. You can avoid this risk by choosing a reliable broker that is regulated by a reputable organization.

 

Leverage Risk

Leverage is among the biggest benefits of forex trading. However, it deepens the other forex trading risks as we shall see below:

  • Should you take huge market risk with no stop loss then any big losses triggered by sudden fluctuations will be leveraged upwards
  • To acquire unlimited leverage you may have to find a broker within a poorly controlled jurisdiction. However, doing so increase your counterparty risk.
  • If liquidity crush triggers ballooning of your trading costs you will experience high leverage because the spread is an action of your full position.

It is worth mentioning that even if leverage is readily available you do not have you use it.

 

Finally

While trading comes with various risks, you can counter them by adopting effective risk management strategies.

 

Wealth Management

HOW ALGORITHMS CAN BOOST YOUR TRADING PROFITS

Gabriele Musella is CEO and co-founder of Coinrule

 

Trading, whether for cryptocurrencies or stocks, is about buying and selling at the right time in order to increase your overall funds and make a profit.

There are over 14 million day traders[i] around the world. However, to make money when trading, you have to invest a lot of time.

It requires spotting patterns and identifying opportunities. It is this time requirement that has been a key driver in the development of algorithms to help when trading.

Day trading is when someone who buys and subsequently sells financial instruments like stocks, cryptocurrencies or futures within the same trading day.

Millennials are 58% of online traders and over 75% of cryptocurrency traders[ii], whether that is Bitcoin, Ethereum, Polkadot or any other of the nearly, 7000 existing cryptocurrencies[iii].

Low barriers to entry and the ability to trade online make it tantalising for this age group. But, is it profitable?

 

Profit or Loss?

It’s estimated that 95% of day traders[iv] lose money.

There are lots of reasons why; with under-preparation[v] being most often cited as the main reason. People start too quickly and don’t have a strategy they stick to.

So, where do trading algorithms fit into this?

 

Gabriele Musella

Trading With Algorithms

Put very simply, a trading algorithm or strategy is a set of rules that, together, define when trades should take place. The algorithm helps a cryptocurrency trader to either buy, or sell, at the right time. This enables them either to minimise losses and take profits.

The algorithm can be tested on historical data, on different and past market conditions, giving you scenarios that it will help deliver good returns when used on the current markets.

These rules can then be executed by trading bots to make the trades at the right time.

 

Why Use a Trading Algorithm?

There are three main reasons for using a trading algorithm:

  1. Time

The time needed to analyse the available market data and spot the right moment to trade is considerable. Most traders simply don’t have this time available, so a trading algorithm can help.

  1. Too much data

There is simply too much data available that needs to be analysed to make profitable trades. For example, with over 7,000 cryptocurrencies on the market, it is impossible to know everything about all of them without automated assistance.

  1. It’s a steep learning curve

What I see is that most hobby investors have about one or two hours a week available to them to learn ‘how’ to trade, ‘what’ to trade and ‘when’ to trade. This simply isn’t enough. Trading algorithms are constantly learning because of their ability to consume and analyse large amounts of market data.

 

What Are The Alternatives?

  1. Scripts

One alternative to using a trading algorithm would be to program a script. Trading scripts enable automatic trading, but they can only follow one strategy, are difficult to code and struggle to react to market changes quickly.

  1. Copying the professionals

Copy trading is where professional traders allow people to copy the trades they do. They get paid to allow public access to their trading activities. If the right traders are chosen, this can be a highly successful alternative, but the fees can be very high, up to 30% of the profit.

  1. Do it yourself

If you have the time – a lot – and the analytical skills, you may not need a trading algorithm and you can go back to trading manually.

 

How to Use a Trading Algorithm

 Choose a supplier

There are plenty of suppliers of algorithm software. Most are for large firms, however companies like Coinrule aim to help hobby investors, occasional investors and professional traders, to have easy access to trading algorithms. Coinrule’s customers are trading anything from $150 a month upwards, to $millions per month.

You can sign up for free or choose which of the three pricing plans work best for you, based on your trading budget, template strategies and required execution speed.

 

Choose Your Strategy

Choosing the perfect trading strategy takes research and time. Bitcoin traders often use a long-term strategy, with trading on other cryptocurrencies being done using shorter-term strategies. However, you need to choose your own. To help you choose check out these videos:[vi] https://www.youtube.com/playlist?list=PLA9Pvtmlbvb5cp0Ou0ePADDGzAF-vt1

 

Pick Your Cryptocurrencies

Bitcoin is obviously the most well-known, but there are nearly 7000 others. Keeping track of all of them will be impossible, so choices need to be made, at least initially. You can, of course, move between them in the future.

 

Define Your Risk Levels

One of the most important aspects of implementing an automated trading strategy is to prevent significant losses that will potentially compromise a trader’s capital over the long-term. Before making money, it’s important to learn how to protect your crypto portfolio.

Protecting funds is one of the most important aspects of the algorithm. So set your risk levels accordingly and ensure the algorithm is set up to protect you from losses.

 

Allocate A Trading Budget

When first starting to invest in cryptocurrencies, it is vitally important to set a budget that can be lost without real impact on your personal finances. This initial budget should then be broken down into a daily trading budget, i.e. how much will be invested on a daily basis. The 1% Risk Rule is an often-quoted rule[vii]. If the portfolio is, for example, £100,000, no more than £1,000 is traded on any single trade. This protects your capital from big losses.

Cryptocurrencies are in-vogue, and you hear many stories of huge fortunes, and losses, being made by people trading on these exchanges. The low barriers to trading and it all being online can tempt people in very quickly, believing they will make a lot of money. This, as mentioned earlier, is a major reason for most day traders losing money. By following the guidelines above, investing time in learning what you can, and then making use of a trading algorithm, portfolios can be protected and, ultimately, grown.

 

[i] https://brokernotes.co/wp-content/uploads/2017/08/BN-research-report_2018-FINAL.pdf

[ii] https://brokernotes.co/wp-content/uploads/2017/08/BN-research-report_2018-FINAL.pdf

[iii] https://e-cryptonews.com/how-many-cryptocurrencies-are-there-in-2020/#:~:text=According%20to%20CoinMarketCap%2C%20the%20total,4%2C928%20cryptos%20in%20the%20market.

[iv] https://cointelegraph.com/news/day-trading-bitcoin-why-95-of-traders-lose-money-and-fail

[v] https://www.warriortrading.com/why-day-traders-lose-money/

[vi] https://www.youtube.com/playlist?list=PLA9Pvtmlbvb5cp0Ou0ePADDGzAF-vtCS1

[vii] https://www.thebalance.com/day-traders-stick-to-the-1percent-risk-rule-1030858

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Top 10

WHY HIGH NET WORTHS SHOULD BE LOOKING AT ANGEL INVESTING IN A NEGATIVE INTEREST RATE ENVIRONMENT

By Oliver Woolley, Envestors

 

As England gets through its second lockdown, Bank of England policymakers report the UK we may be headed for negative interest rates. This would be the for the first time this has happened in the bank’s 326-year history.

With interest rates already at 0.1%, central bank officials announced an additional £150bn stimulus package, in an attempt to boost consumer spending during the second wave of the pandemic.

Despite news of a vaccine, the BoE has taken the total stimulus to £895bn, as double-dip recession forecasts emerge.

In the event of negative interest rates becoming a reality, banks would have the incentive to lend more by making loans cheaper, but account holders would likely be asked to pay to hold money in a savings account.

While plans for negative interest rates are pending, government bonds are already selling at a negative yield of -0.003%, with investors hoping for the safe haven of government issued bonds paying out to get their money back in three years.

Between negative returns on savings accounts, lower yield on bond holdings, a volatile stock market and a projected dip in property prices, investors don’t have many options to diversify their portfolio in a negative rate interest environment.

However, for investors who are comfortable with risk, early-stage investing may be the answer. Angel investors support early-stage companies through financial backing, typically in exchange for equity in the company. An additional benefit for angel investors is the generous tax reliefs offered under the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).

 

Oliver Woolley

What is angel investing and why is it attractive?

An angel investor (also known as a private investor, seed investor or angel funder) supports early-stage enterprises by providing funding and getting actively involved in the business. Typically, the amount invested is between £5,000 and £50,000 per investment.

Early-stage investments are high risk as the number of early-stage businesses that grow through to an exit is low. Previous research suggested that 56% of investments in early-stage companies went bust. This is why experienced angels aim to build a diverse portfolio of 20+ investments.

While angels usually have to wait a number of years before recovering their initial investment, returns can be considerable. Due to the high risk nature of angel investing, high net worth individuals are usually looking for a 2.5x Return of Investment (RoI).

When first starting out, an investor should look for a well put together business plan with a defined exit strategy. Many angels choose to join an angel network when starting out, where investors can pool investment capital and invest alongside like-minded, experienced investors.

 

Tax relief through EIS and SEIS

In order to encourage investment in start-up companies which play a vital role in the economy, the UK government has launched several tax relief programmes, including the Enterprise Investment Scheme (EIS). This scheme, which makes investing in early stage enterprises tax-efficient, has encouraged £22bn in investment in 31,365 companies.

By investing in an EIS eligible company, angels receive income tax relief of 30% of the amount subscribed for eligible shares. Investors can put in up to £1m per tax year in EIS qualifying companies for the tax relief; this cap rises to £2m if investing in knowledge-intensive EIS companies.

In order to qualify, companies have to be trading for less than seven years and can raise a maximum of £12m.

Through EIS, angels receive a Capital Gains Tax (CGT) exemption, carry back and loss relief which can be offset against CGT or Income Tax.

Looking at a practical example:

If an angel invested £10,000 and the company failed, their actual loss would only be £7,000, due to the 30% income tax relief. However, a top rate income taxpayer paying tax at 45% will be able to claim loss relief on their tax liability at the 45% level. In this example, they’re eligible for further relief of £3,150, making their actual loss £3,850.

The success of EIS led to the introduction of the Seed Enterprise Investment Scheme (SEIS), promoting investments in riskier, earlier stage companies. About 80% of UK angel investors seek relief through EIS or its sister scheme, SEIS.

SEIS allows HNWIs to invest up to £100,000 and receive 50% tax relief on their investment. In order for companies to be eligible for SEIS, they have to have been trading for less than two years and cannot have more than £150,000 in previous investment.

 

Hot investment sectors

Reports from the British Business Bank and the UK Business Angels Association reveal that many investors are still seeing positive returns during the pandemic.

While angels are battling economic uncertainty, around three quarters are optimistic about the market bouncing back within the next 12 months.

Healthcare, Digital Health and MedTech, BioTech, Life Sciences and Pharmaceuticals are the leading sectors in terms of investor engagement during the COVID-19 crisis.

Software as a Service and FinTech have fared well throughout the pandemic and are still attracting a large number of investors.

Getting started with angel investing is now easier than ever, with an array of angel networks that can provide advice and support. Industry-association, the UKBAA, offers an Angel Investment Accelerator which is designed for those new to early-stage investing.

In order to choose the right angel network, HNWIs should look for the most active networks; Research body Beauhurst recently published a list of the most active networks in the UK.

Active networks will present a greater array of screened opportunities as well as connecting new investors to more experienced ones.

The best networks cover a variety of regions, sectors and investment sizes, and they’re forthcoming with examples of previous investments, so first-time angels can make the right choice on how to grow their portfolio.

So, while looming negative interest rates may require a rethink of current investment strategies for many – it might also open up a new and exciting investment class that offers much more than just financial gains.

 

ABOUT THE AUTHOR

Oliver Woolley is CEO and co-founder of Envestors. Envestors’ digital investment platform brings together entrepreneurs and investors across geographies, communities and sectors – creating the single marketplace for early stage investment in the UK.

Envestors partners with accelerators, incubators and angel networks to provide a white-label platform empowering them to promote deals, engage investors and connect to other networks.

Founded in 2004, Envestors has helped more than 200 high growth businesses raise more than £100m through its own private investment club.

Envestors is authorised and regulated by the Financial Conduct Authority.

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