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Four ways traders can manage risk

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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.

Business

How can businesses boost employee experience for finance professionals?

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By Martin Schirmer, President, Enterprise Service Management, IFS

Over the course of the last year, The Great Resignation has seriously impacted organisations across the globe. Staff are quitting in huge numbers, leaving companies unprepared and struggling to fulfil their workloads. In fact, mass departures are happening at all levels of the labour market, as employees attempt to adapt to the hybrid working model and growing socio-economic uncertainty.

In light of this, optimising the employee experience (EX) to attract and retain talent has become a top priority for employers. Organisations have come to understand the necessity of taking immediate steps to drive employee engagement and reshape workplace culture.

The financial services (FS) industry is no exception to this trend. From increasing employee burnout to growing career dissatisfaction, the pandemic has exacerbated the need for transformation across finance teams. This is exemplified by recent data from Spendesk, which found that approximately 40% of finance professionals are willing to leave their roles or already have concrete plans to do so.

Organisations looking to get ahead of the competition must put in extra efforts to retain their existing workforce. The fact is that employee expectations and requirements have irreversibly changed, with more workforces becoming increasingly distributed. Today’s hyper-connected workforce values flexibility and simplicity, and it is organisations which offer these experiences that will succeed in the long term.

As part of this process, finance companies must look towards the power of technology to create seamless user experiences across devices. From automating workflows to improving overall efficiencies, Enterprise Service Management (ESM) can help organisations to boost user satisfaction and go that extra mile for their employees.

How poor EXs are driving finance teams to quit

With over 40% of employees spending a significant proportion of their time carrying out mundane, manual tasks, it is not surprising that poor EXs are having a detrimental impact on job satisfaction. Finance teams in particular have been slower to digitise core processes, leading to a heavy reliance on manual tasks. This not only increases the amount of time spent on each task, but also impacts the engagement levels of finance professionals who cannot focus on more strategic aspects of their roles.

As a result of the pandemic, flexibility has also moved to the forefront of finance teams’ desires. Given the fast-paced nature of this industry, the conversation surrounding work-life balance has increased rapidly. Failure to offer flexible working policies, coupled with a lack of technology to facilitate this flexibility, has led to poor EXs across the board.

Most notably, the overarching move to omnichannel, digital-first approaches has dramatically reset both customer and employee needs. Finance is the third-slowest running corporate function behind legal and IT. Operating in a competitive environment, 73% of finance operations are facing pressures to speed up, improve efficiency, and prioritise automation.

Mitigating the problem using technology

ESM, an offshoot of IT Service management (ITSM), is the cornerstone of smart digital transformation for organisations. It can help finance teams to streamline and automate routine processes, such as monitoring the status of service requests, approving expenses, sending invoices, and tracking payments. In turn, this will free up employees’ time, reducing the burden of manual tasks and enabling them to focus on the more strategic tasks.

Another advantage ESM can offer finance teams is the ability to adapt to each department’s minimum requirements for data privacy. Accounting, for example, needs additional layers of compliance built into the system.

ESM can also facilitate cross-departmental collaboration, helping finance professionals to communicate with the wider business and perform tasks more effectively.  Organisations can use ESM to incorporate all internal services into a single platform, offering employees a well-rounded view of the business and promoting a sense of community across all levels of an organisation. This will boost productivity, whilst enhancing visibility and control.

Ultimately, the current job landscape has brought with it a new set of challenges. Organisations in the FS industry looking to navigate the storm and retain top talent must refocus their efforts on bolstering the EX. Embracing a new era of technological innovation that empowers employees and boosts engagement is a critical step in this process.

 

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Business

CBDCs: the key to transform cross-border payments

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Dr. Ruth Wandhöfer, Board Director at RTGS.global

 

If you work in finance, you’ll have been hearing a lot about central bank digital currencies (CBDCs) and the moves different markets are making towards using, regulating and evaluating the viability of moving to an economy based on digital currency.

We are already seeing progress in the research, piloting and introduction of CBDCs into the financial system. The Banque de France for example, recently launched its second phase of CBDC experiments in line with the “triple digital revolution” unfolding in the financial sector. The infrastructures of financial markets and fintechs, however, are not prepared to accommodate their security, stability, and viability.

This could be an issue in the not too distant future. Each year, global corporates move nearly $23.5 trillion between countries, equivalent to about 25% of global GDP. This requires them to use wholesale cross-border payment processes, which remain suboptimal from a cost, speed, and transparency perspective. In fact, the G20 cross-border payments programme considers improving access to domestic payment systems that settle in central bank money, as one of the key components in facilitating increased speed and reducing the costs of cross-border payments.

The current state of cross-border payments

International transactions based on fiat are currently slow, expensive, and highly risky due to today’s disconnected financial infrastructure, messaging, and liquidity. Wholesale cross-border payment settlement can take 48 hours or longer, which is not practical in today’s digital world. Even if not every market moves to CBDCs, in an increasingly digital era, cross-border settlements between central banks will unavoidably involve dealing with CBDCs. So, not only will we have different currencies, we’ll have different technical forms of currency being exchanged – digital and fiat – as markets adopt CBDCs at different rates, adding another layer of complexity to cross-border settlements.

While there is much anticipation about the opportunities CBDCs can bring, the adoption of this technology will only be widespread if payment and settlement capabilities are overhauled to allow for new innovations in currencies.  This need for transformation represents an opportunity to redesign existing infrastructure to support cross-border CBDC transactions.

The current cross-border payments system involves correspondent banks in different jurisdictions using commercial bank money. Uncommitted credit lines used in cross-border transactions are a potential risk for any bank that relies on credit provided by a foreign correspondent bank. Interestingly, there is no single global payment and settlement system, only a complicated network of interbank relationships operating on mutual trust. While trust has allowed financial systems to function smoothly, when it begins to fail, as it did during the 2008 financial crisis, the result can be catastrophic.

Following the crisis, the Bank for International Settlements (BIS) implemented the Basel III agreement, which required banks to maintain additional capital against correspondent banking account exposures. These risk-weighted assets impose a costly capital charge on positions held by banks at other banks under correspondent arrangements. While this framework helps combat risk, it neglects to address the inherent problems in traditional correspondent banking that contribute to these risks.

Making the case for CBDCs

CBDCs can offer an improvement in settlement risks and are certainly thought to have potential benefits by the BIS. If implemented correctly, wholesale CBDCs can indeed accelerate interbank transactions while eliminating settlement risk. They can also encourage a more efficient and straightforward method of executing cross-border payments by reducing the number of intermediaries.

It is likely the evolution towards CBDCs will initially see the financial market supplement rather than replace existing payment instruments with new types of digital currency. CBDCs will coexist with current forms of money in a wholesale context, and their payment rails will also work alongside the existing payment systems. In simple terms, CBDCs will need to be linked to the broader capital markets ecosystem and applications such as securities settlement, funding, and liquidity.

If built with an innovation-first mindset, the future of banking infrastructure should provide full interoperability and convertibility between fiat, CBDCs, and any other type of digital money used in wholesale payments.

The future of CBDCs

To unlock the full potential of CBDCs, a ‘corridor network’ will need to be formed. This involves combining multiple wholesale CDBCs into a single, interoperable network under common governance agreed upon by all central banks involved. The legal framework of this platform would then allow for payment versus payment (PvP) or, where applicable, delivery versus payment settlement.

Practical wholesale CBDCs appear to be on the horizon, either as a supplement to existing financial systems or as part of a transition to a digital, cashless world. Looking ahead, central banks would benefit from collaborating with fintechs that provide innovative cloud native technology to enable seamless wholesale cross-border payments without interfering with the flow of funds. If wholesale CBDCs are to become a reality, fintechs must be prepared to accommodate them.

 

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