Is Currency Trading Stressful?
Many people are excited by the idea of trading in a 24-hour market, going head-to-head with the “big boys” and controlling large amounts of currencies. Other people are terrified by this prospect. They want to try currency trading, but the image they have of a Type-A, caffeine-charged, numbers crunching, stressed-out trader is not consistent with their personality or the type of lifestyle they desire. Does a Forex trader’s life really need to be filled with stress?
How Stress Develops
Let’s look at where stress originates. I could discuss several psychological topics on stress, but that would not be useful to a trader who simply wants to trade Forex without substantially increasing the amount of stress in his life. So, where does stress come from?
The short answer is uncertainty. A trader’s life is filled with uncertainty: Will I make or lose money on this trade? Will I get a margin call? What will happen to the USD today? How will the payrolls report affect the market? The questions (and the uncertainty) are endless. Traders choose a unique way of life with challenges that many other professionals simply don’t encounter on a daily basis. Uncertainty is injected into each trading day -- and each trade.
How to Control Stress
Before you start to think that stress is simply a part of every trade that cannot be controlled and definitely never eliminated, think again. There are aspects of a trade that we simply cannot control, like how the employment report will affect the market or whether interest rates will increase or decrease. (Many traders consider this uncertainty to be exciting.) However, we can participate in the market’s excitement while controlling the uncertainty and minimizing the losses. Below are a few ways to control trader stress.
Use A Trading System
Trader stress can be reduced by using a good trading system. There is no need for a lifelong quest for the holy grail of stress reduction or searching for the secret of the stress-free trade like a modern day Ponce de Leon! The wisdom of the stress-free trade can be found in a good trading system.
Use Risk Management Techniques.
Always use your stop loss orders . They will allow you to sleep soundly.
Always use limit orders to lock in profits. Remember you never lose money when you take a profit. You lose money when you lock in losses or let profits run down to losses.
Don’t let fear or greed control you.
Use margin in moderation. Remember, it can be a useful tool to multiply your profits, but it can also make losses grow exponentially.
Less Common Ways to Reduce Trader Stress
These techniques may seem irrelevant or that they are not directly related to trading, but experienced traders know that they are useful and help to keep you trading through the worst of times.
Know the big picture.
No trade exists in isolation. The Intermarket approach notes that every trade is part of a larger picture. Each trade must fit into that picture like a piece of a puzzle. This means every trade must have a reason or purpose of which the trader is acutely aware. This transcends trading for money. It refers to the adoption of the trading lifestyle that is consistent with your personal goals and values.
Practice Detachment.
Once a trade is placed, let it go. Every trader knows the temptation to constantly watch how a trade is performing. The detailed, real-time information available on the Internet makes it possible to watch a trade as it moves up or down. Resist the urge. If you have a good trading system with your stop orders in place, there is nothing more for you to do on this trade. Constantly watching it with your finger over the sell button can be very stressful.
Have a Panic Button.
Every trader has his or her moments of panic. When a trade is going the wrong way, traders often wonder whether they should close the trade (even when their trading system says to hold). The market can be quite volatile and any set of triggers can cause a trader to panic. When panic sets in, the trader can simply press the Panic Button. A Panic Button is any action helps to alleviate tension or break the rising anxiety cycle by diverting the trader’s attention from the immediate trading stressor. Consider exercising, taking a walk, or counting to ten.
Remember Your Trading Wisdom.
The trading wisdom is the lesson learned from this trade. Using only positive language, write down anything you learned from this trade. This technique helps the trader to feel more control and reduce the level of uncertainty in present and future trades.
Trading Forex does not have to be stressful. Taking simple steps can help control the primary cause of trader stress: Uncertainty. And they can also help the trader to feel more happiness and less anxiety in trading Forex.
A knock-out option belongs to a class of exotic options – options that have more complex features than plain-vanilla options – known as barrier options. Barrier options are options that either come into existence or cease to exist when the price of the underlying asset reaches or breaches a pre-defined price level within a defined period of time. Knock-in options come into existence when the price of the underlying asset reaches or breaches a specific price level, while knock-out options cease to exist (i.e. they are knocked out) when the asset price reaches or breaches a price level. The basic rationale for using these types of options is to lower the cost of hedging or speculation.
Basic features of knock-out options
There are two basic types of knock-out options:
- Up-and-out – The price of the underlying asset has to move up through a specified price point for it to be knocked out.
- Down-and-out – The price of the underlying asset has to move down through a specified price point for it to be knocked out.
Knock-out options can be constructed using either calls or puts. Knock-out options are over-the-counter (OTC) instruments and do not trade on option exchanges, and are more commonly used in foreign exchange markets than equity markets.
Unlike a plain-vanilla call or put option where the only price defined is the strike price, a knock-out option has to specify two prices – the strike price and the knock-out barrier price.
The following two important points about knock-out options need to be kept in mind:
- A knock-out option will have a positive payoff only if it is in-the-money and the knock-out barrier price has never been reached or breached during the life of the option. In this case, the knock-out option will behave like a standard call or put option.
- The option is knocked out as soon as the price of the underlying asset reaches or breaches the knock-out barrier price, even if the asset price subsequently trades above or below the barrier. In other words, once the option is knocked out, it’s out for the count and cannot be reactivated, regardless of the subsequent price behavior of the underlying asset.
Examples
(Note: In these examples, we assume that the option is knocked out upon a breach of the barrier price).
Example 1 – Up-and-out equity option
Consider a stock that is trading at $100. A trader buys a knock-out call option with a strike price of $105 and a knock-out barrier of $110, expiring in three months, for a premium payment of $2. Assume that the price of a three-month plain-vanilla call option with a strike price of $105 is $3.
What is the rationale for the trader to buy the knock-out call, rather than a plain-vanilla call? While the trader is obviously bullish on the stock, he/she is quite confident that it has limited upside beyond $105. The trader is therefore willing to sacrifice some upside in the stock in return for slashing the cost of the option by 33% (i.e. $2 rather than $3).
Over the three-month life of the option, if the stock ever trades above the barrier price of $110, it will be knocked out and cease to exist. But if the stock does not trade above $110, the trader’s profit or loss depends on the stock price shortly before (or at) option expiration.
If the stock is trading below $105 just before option expiration, the call is out-of-the-money and expires worthless. If the stock is trading above $105 and below $110 just before option expiration, the call is in-the-money and has a gross profit equal to the stock price less $105 (the net profit is this amount less $2). Thus, if the stock is trading at $109.80 at or near option expiration, the gross profit on the trade is equal to $4.80.
The payoff table for this knock-out call option is as follows –
Example 2 – Down-and-out forex option
Assume a Canadian exporter wishes to hedge US$10 million of export receivables using knock-out put options. The exporter is concerned about a potential strengthening of the Canadian dollar (which would mean fewer Canadian dollars when the U.S. dollar receivable is sold), which is trading in the spot market at US$ 1 = C$ 1.1000. The exporter therefore buys a USD put option expiring in one month (with a notional value of US$10 million) that has a strike price of US$ 1 = C$ 1.0900 and a knock-out barrier of US$ 1 = C$ 1.0800. The cost of this knock-out put is 50 pips, or C$ 50,000.
The exporter is wagering in this case that even if the Canadian dollar strengthens, it will not do so much past the 1.0900 level. Over the one-month life of the option, if the US$ ever trades below the barrier price of C$ 1.0800, it will be knocked out and cease to exist. But if the US$ does not trade below US$1.0800, the exporter’s profit or loss depends on the exchange rate shortly before (or at) option expiration.
Assuming the barrier has not been breached, three potential scenarios arise at or shortly before option expiration –
(a) The U.S. dollar is trading between C$ 1.0900 and C$ 1.0800. In this case, the gross profit on the option trade is equal to the difference between 1.0900 and the spot rate, with the net profit equal to this amount less 50 pips.
Assume the spot rate just before option expiration is 1.0810. Since the put option is in-the-money, the exporter’s profit is equal to the strike price of 1.0900 less the spot price (1.0810), less the premium paid of 50 pips. This is equal to 90 – 50 = 40 pips = $40,000.
Here’s the logic. Since the option is in-the-money, the exporter sells US$10 million at the strike price of 1.0900, for proceeds of C$10.90 million. By doing so, the exporter has avoided selling at the current spot rate of 1.0810, which would have resulted in proceeds of C$10.81 million. While the knock-out put option has provided the exporter a gross notional profit of C$90,000, subtracting the cost of C$50,000 gives the exporter a net profit of C$40,000.
(b) The U.S. dollar is trading exactly at the strike price of C$ 1.0900. In this case, it makes no difference if the exporter exercises the put option and sells at the strike price of CAD 1.0900, or sells in the spot market at C$ 1.0900. (In reality, however, the exercise of the put option may result in payment of a certain amount of commission). The loss incurred is the amount of premium paid, 50 pips or C$50,000.
(c) The U.S. dollar is trading above the strike price of C$ 1.0900. In this case, the put option will expire unexercised and the exporter will sell the US$10 million in the spot market at the prevailing spot rate. The loss incurred in this case is the amount of premium paid, 50 pips or C$50,000.
Pros and Cons
Knock-out options have the following advantages:
- Lower outlay: The biggest advantage of knock-out options is that they require a lower cash outlay than the amount required for a plain-vanilla option. The lower outlay translates into a smaller loss if the option trade does not work out, and a bigger percentage gain if it does work out.
- Customizable: Since these options are OTC instruments, they can be customized as per specific requirements, in contrast with exchange-traded options which cannot be customized.
Knock-out options also have the following drawbacks:
- Risk of loss in event of large move: A major drawback of knock-out options is that the options trader has to get both the direction and magnitude of the likely move in the underlying asset right. While a large move may result in the option being knocked out and the loss of the full amount of the premium paid for a speculator, it many result in even bigger losses for a hedger due to the elimination of the hedge.
- Not available to retail investors: As OTC instruments, knock-out option trades may need to be of a certain minimum size, making them unlikely to be available to retail investors.
- Lack of transparency and liquidity: Knock-out options may suffer from the general drawback of OTC instruments in terms of their lack of transparency and liquidity.
The Bottom Line
Knock-out options are likely to find greater application in currency markets than equity markets. Nevertheless, they offer interesting possibilities for large traders because of their unique features. Knock-out options may also be of greater value to speculators – because of the lower outlay – rather than hedgers, since the elimination of a hedge in the event of a large move may expose the hedging entity to catastrophic losses.
Stock Market gives immediate returns to people who invest wisely. If you are looking forward to make quick money, you can work in stock market. Stocks are financial instruments which make you part owner in the company or the firm. When you buy stock of a company, you are a passive owner of the company. Almost all corporations issue shares to public and can be traded on stock exchanges around the world.
As an investor you should follow some golden rules of investing. Some of these important rules are listed here,
* Buy when low and sell when high : This is a simple concept, but often eludes practice. Your entry in every stock should be at the low, not at a high. As a general rule, you should buy when every one else is selling while you should sell when everyone else is buying.
* What goes up comes down : If you are consistently observing that prices for a share are going up, it will come down surely. The reverse is equally true. If you begin looking for a reason why market is down or up, you will waste time and energy. Market as whole moves up and down due to a wide variety of reasons, and as a retail investor you have very little control over it.
* Information flow in Stock Market : Understand that, if you learn a clear tip about some stock, million other investors would have heard it too, so they also will be doing what you want to do. This action will never give you profits. Profits are generated when you move against the heard with information with no one or very small group of people have.
* Understand market sentiment : As a savvy investor, you can try and understand the nature of market. To understand the nature of market there are three sets of theories, Fundamental Analysis, Technical Analysis and Risk / Money Management Techniques. Read all of them.
* Disciplined trading : You should always trade with a discipline. Cut your losses quickly and reap profits. As an investor out to make money in short time, as soon as you see your profit, exit the stock.
* Belief in efficiency of market : Remember that markets are not efficient and when you invest in stock market, there is no way that you will have all the information about the company. So, your trading strategy should be based on partial information not on a belief that you have all the information required for trade.
* Advice from other people : Advice from friends, brokers and trading firms at Wall Street is very good to listen, but what you do should always be based on your own judgment. The key is your own logic and wisdom as the firms out there will loose nothing in case your stock looses value. In fact, if you list to their advice and trade through them, they will make money irrespective the fact that you loose or make profits.
If you remember the points mentioned above, you can make quick money on stock markets easily.
