In forex, derivatives or futures trading, it is money management that becomes as vital as trading strategies and risk management. Profits can be made on forex, options, and futures but conserving capital is a primary objective. Considering the wide range of objectives and diverse trading instruments used by each specific type of fund, it is important to note the varying risk concerns which apply to different types of fund managers.
Absolute funds as a case in point do operate in a diversity of market conditions – both rising, falling and flat markets. In derivatives market trading, a well-known strategy involves ‘hedging’ which when the strategy is based on consistent sidewards motion, then sold calls, for example, tend to decline in value. Thus, a hedging strategy in such a case would entail selling call options in what is known as an ‘out of money’ strategy. In a sidewards market, that is where no material price action has occurred a hedging strategy can produce profitable trading. But, as always this should always be based on sound money management principles. Money management is a crucial aspect of most absolute funds.
In forex markets, some currencies are relatively stable while others are extremely volatile and then a pairing of two volatile currencies can clearly be a high-risk trade. In cases where a currency is traded using options for example call or put options then such volatile is usually priced into the options. This makes option trading on highly volatile currencies relatively risky but laced with the potential for quick and high profits. Not all trader shave the stomach for such chronic rises and would prefer to hold forex futures contracts based on long term fundamentals, perhaps a long term view of the US dollar or a view that the Australian dollar can only go one way based on long term contracts in place for delivery of hundreds of billions of dollars of commodities which require payment in Australian dollars.
A trader or investor would obviously manage their funds in such trades on the basis that risk management would mandate that no single trade should expose the trader to more than say 5 percent of their capital to be invested. That is the essence of sound money management in forex, options or futures trading – minimizing the risk on any single trade.