By Dáire Ferguson, CEO at AvaTrade

Understanding the markets in which you are trading is incredibly important to optimising profit, as well as manging risk and loss. While trading can be incredibly lucrative, it can often be difficult to judge which way the market will move – especially when executing shorter-term traders, where unknown factors can cause unexpected movements. Being aware of the risks is vital to avoid unnecessary losses and to optimise the trading experience.

Dáire Ferguson

There are several techniques that can be employed to make sure the risks associated with trading are controlled, rendering the trading experience smoother and more enjoyable. From beginners to experts, having these tactics in your arsenal will enable traders to be savvier, and more confident.

Understanding the risks

To really be able to manage risk, it is imperative to understand the two types of trading risks.

Leverage

Leverage is where traders stake only a percentage of the value of the underlying asset they wish to trade on but accept exposure to the full value of the profit and loss that comes with the asset’s price changes. This enables traders to take sizeable positions for comparatively less trading capital, thus providing an opening for big wins and substantial rewards.

However, with this comes the risk of similarly significant losses. As an example, if a trader opens a £100 trade on an asset worth £1,000, using leverage of 10:1, this means that if the assets value increase by 10 per cent, the trader’s money will be doubled. But if it drops by just 10 per cent, the trader will lose all their stake. This balance of high risk and high reward necessitates careful management. Leveraging typically applies to purchasing and trading contracts for difference (CFDs).

Volatility

Volatility is characterised by unexpected fluctuations in the prices of assets and is defined as the rate at which pricing rises or falls given a particular set of returns. Volatility applies to all assets, but the regularity and size of price changes differs hugely across different asset groups. In fact, in some markets, volatility is actually predictable. The cryptocurrency market is well known for its fluctuations, characterised by frequent and, often, significant changes in price.

There are scenarios in which volatility can be desirable for some traders as it fosters greater profit margins. However, it also sharply increases the potential for large losses. Nevertheless, there are a number of ways to spot incoming market fluctuations. These include economic volatility, geopolitical tensions, and changing policies.

Managing the risks

Choose the right broker

So, what can traders to do manage these risks? The first step is to choose the right broker. Having the right broker can go a long way to limiting the risks that come with trading, including managing counterparty risk. For example, when you purchase CFDs, you are purchasing a contract with a broker – not the asset itself. Therefore, traders must be 100 per cent certain in the knowledge that the broker they’ve chosen to operate with is capable of making good on the value of that contract.

Traders who are just starting out on their trading journey should look to open a trading account with an established name that is well regulated in a variety of jurisdictions. Higher-quality brokers will generally have a wider range of risk management tools and offer better features, which will allow traders to manage the buying and selling of assets in a better, more sophisticated manner.

Take out protection on riskier trades

For new traders, or those who are looking for extra support, it is worth considering taking out protection against losses for a set period of time. Certain brokers offer risk management tools that provide thorough protection against such losses. These tools generally require just a small fee, not unlike the premium on an insurance policy. These risk management tools allow users to stay in the trade, riding out any short-term drops in value and benefitting from a positive overall momentum of the position. Therefore, if the market moves in a different direction to what was originally expected, users only lose the cost of purchasing the protection and can recover their losses.

Set-up stop-loss orders

Another form of protection against losses is through a stop-loss order. This is an instruction that is executed automatically when certain conditions are met. Therefore, stopping losses from falling below a certain point, and setting a limit on how much an investor can lose on a trade. In the case of a stop-loss order, the position is sold at a predetermined rate – below the current market price for a long position, or above the current market price for a short position.

Stop-loss orders remove the user from the trade at a set price drop. In comparison, risk management tools allow the user to ride out any short-term drops in value, with the potential to benefit from a positive overall momentum of the position.

Manage the capital-to-trade ratio

One simple way traders can reduce the risk of accumulating excessive losses is to keep their capital-to-trade ratio under control. This is the amount of capital left exposed to losses in trades compared to the total amount of capital traders have available to themselves.

A sensible rule for traders to follow is to not exceed a capital-to-trade ratio of 10 per cent, and not to risk more than two per cent of the overall capital on a single trade. This doesn’t mean always taking very small positions – it means traders should hedge their risks on whatever positions they choose to take.

It is important that before traders even begin to trade, they make sure that they understand the risks they face. Once they have taken the time to do that, they can begin to contemplate these four ways to manage those risks and then start trading. This is an exciting time to be entering the world of trading, and these considerations should ensure that the trading experience is as enjoyable and profitable as possible.

Adam Zoucha, Managing Director, FloQast EMEA

Financial management is one of the oldest professions in the world, and for most of that history, it was essentially applied mathematics – number-wizards keeping track of the financial figures and making sure everything tallied up when it was supposed to. However, ever since digital technology made its way out of the world’s laboratories and into its offices, the role of finance teams has been steadily changing.

Number crunching remains the foundation of accounting in the 21st Century, but for senior finance managers and CFOs in particular, job responsibilities — and expectations from within the organization — don’t stop there.

Commercial Leadership

As digital technology automates manual processes, CFOs have been freed up to focus on delivering more analytical information and insights. The business landscape is continuing to shift quickly and agile companies need to make strategic decisions that are informed by real financial data to pivot and survive. That means the modern CFO needs to be able to provide commercial leadership, feeding into business development and growth plans from a foundation of rock-solid financial data.

This is a major opportunity for added value. Although most CFOs have years of experience making tough financial decisions after analysing data, few have been working closely with the operational side of the business. Senior leaders across all industries are asking their finance teams to enable truly intelligent, up-to-the-minute decisions – so what skills do they need to make the most of that opportunity?

Adam Zoucha

Combining Strategic Leadership with Technological Improvements

Financial leaders are adept at aligning tech smarts with financial know-how however, having the know-how without the tools is counterproductive. To deliver on the promise of data-driven strategic leadership we need to pair this combination with the right technology for optimal results.

As accounting software becomes more sophisticated, automation is being used to eliminate repetitive tasks. This means financial controllers are able to assume responsibilities that were once the domain of the CFO and the CFO can focus on strategic initiatives that drive the business forward, while their teams are unburdened from having to perform highly-manual, time-intensive assignments.

But it’s not enough for CFOs to simply plug in the new, shiny tech, hand the keys to the controller, and wait for the actionable insights to roll in. They need to have an intimate understanding of the systems their teams are using, so they can ensure they’re actually aiding productivity and bringing results. Not all software is created equal, but good automation should reduce stress and friction.

CFOs need to be able to identify tech that’s made by accountants for accountants – not just built by software engineers with no on-the-ground experience. Is it making it easier for teams to organise their workflows? Is it giving them greater visibility into progress and outstanding tasks? Is it helping them standardise paperwork and reduce time spent chasing lost receipts? Or is it simply adding steps to a process that was already burdening staff quite enough, thank you?

A crucial part of financial leadership in 2022 is the ability to ask and answer these questions and to support your team in building a technological foundation for accounting excellence.

Reframing Financial Knowledge in an Actionable, Operational Way

Once that foundation is in place, CFOs need strong communication and analytical skills to translate financial data into real-world strategies, collaborating effectively with the CEO, sales and marketing, and other departments.

Put simply, it’s not enough to know how cashflow looked at month-end without broader contextual data about annual and five-year trends, the state of the market, unusual costs or income, and extenuating circumstances (like a global pandemic).

If the company excels in any given month, is that cause for bullish investment? Or a blip to be passed over? If the figures are beginning to sink, is it time to break out the oars, or is the ship likely to right itself in time? These are the kinds of questions CEOs are asking, and if the CFO is to provide confident answers, clean, on-time data is essential.

This brings us back to the question above: Is the technology their team is using designed by accountants who understand the challenges finance teams face? Does it provide the insights they need to answer high-level questions? Does it provide CFOs with the tools they need to cut through the noise and see the underlying story? If they’re to deliver strategic value, those tools are essential.

Finance teams are facing a huge amount of pressure in a fast-changing market, and many accountants are leaving the profession as a result. But with the right combination of intelligent automation, deep visibility, and genuinely people-centric collaboration tools, those stress levels can be brought down – and the CFO can be empowered to confidently advise their C-suite colleagues on overall business strategy.