Risk Management

What is the risk?

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In financial economics, there is no investment activities which has no risk at all in the world. Bills under pillows may be stolen; deposits held in banks may also come to nothing because of the bank failures. Therefore, we should understand the potential risks clearly before we make any investment. Investment risk refers to the uncertainty of the future investment income, and the risk of income loss or even principal loss in the investment. For example, the stock may get stuck, bonds may not get the repayment of principal and interest on time, real estate may fall, etc, all of these things are investment risks. Investors should choose financial instruments based on their own investment objectives and risk preferences. For example, diversification investing is an effective method to control the risk scientifically, it is also the most common method. This method makes a proper proportion for the investment in stocks, bonds, cash and other investment tool, in this way it can reduce the risk and also improve the returns.

Investor’s Risk Management on Trading

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The volatility of gold price is very high, and the gold trading can happen 24 hours globally, most investors can’t follow the gold price information in a whole day. When the gold price have great fluctuation, the orders from the investors may not be executed immediately, so one method to control and manage the risk is to put the orders in advance.

The common and acceptable trading limit orders are:

Limit Order Buy or sell in a indicated price.
Market Order Execute buying or selling unconditionally with real time market price.
Fill or Kill Execute immediately based on market level, cancel the order if the deal can’t happen immediately. This kind of order always happens in floor trading, with the purpose to hide the trading interest so other people can’t know it.
M.O.O., Market On Open Execute the order at prevailing price immediately in the opening.
M.O.O., Market On Close Execute the order at prevailing price immediately in the closing.
Stop Loss
It can effectively close positions when the market is reversed; even when the positions already have profit, use a stop profit order which has the same sense can control the price fluctuation risk effectively.

Execution and disposing of Stop Loss Order

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Stop loss order is easy to have controversy because it contains different sense and execution criterion, the customer should clarify the price and execution method clearly when he send the order. The trading system can’t execute and dispose the stop loss order precisely and effectively until it is sent out clearly. The common stop loss order and execution criterion are as follows:

Stop on trade The stop loss order wont go to the market and to be executed until the deal has happened at target price, deal price equals market price.
Stop on Bid The stop loss order won’t take effect until the bid price on the market equal stop loss price. The stop loss trading for buying will make the deal at a higher price than stop loss price, while the stop loss trading for selling may make the deal at stop loss price or even lower.
Stop on Offer The stop loss order won’t go to the market until the asked price on the market equal stop loss price. So the stop loss trading for buying has a chance to make the deal at stop loss price, while the stop loss trading for selling may make the deal at a lower price.

Order Cancels order ----O.C.O order

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Another common order is O.C.O which contains 2 orders with same trading direction. When this kind of order is sent out, the trading price to execute the order must be that one order price is higher than current price while the other is lower than current price, no matter which direction the price goes, as long as it meets one of the order price, this order will be executed, and after that, the other order will be cancelled.(Order-Cancel-Order).

For example, one customer buy 100 Oz gold at the price of 1,700$, he hopes to get the profit and sell out at 1,750$, meanwhile, he is afraid when the price changes, it drops sharply below 1,680$, so he place another stop-loss selling order with 1,680$ price. But the 2 selling orders he put are both for this 100 Oz position. So no matter which order is executed first, the other order will become invalid and will be cancelled. This is the condition for the so-called O.C.O.