3 Ways to Reduce Your Exposure To The “Grexit” Crisis
A Brief Synopsis of the “Grexit” Crisis
Financial markets don’t cope well with uncertainty. In fact, global markets perform far better on bad news than they do on indeterminate or pending information. Just look at what happened before news of the latest Greek default surfaced. The global market jitters as a result of the impending Greek default and referendum on whether or not to leave the Euro zone, comes as no surprise. Should the Greek government fail to come to a compromise with creditors despite having already defaulted on their mounting pile of debt, an unprecedented exit of the Euro zone, jokingly referred to as “Grexit,” looms.
European leaders have commonly stated, “the Euro is irreversible.” However, a failure to reach a compromise with European and IMF creditors will no doubt result in a Greek exit and perhaps a reissuing of the Drachma. An almost certain economic depression would occur in Greece upon “Grexit” and it remains to be seen what would happen to the rest of the Euro Zone. Greece is just one of the PIGS countries (Portugal, Italy, Ireland, Greece & Spain) currently suffering under the burden of incredibly high debt and it may set a bad precedent if Greece are to leave the economic zone.
Whatever the Greek outcomes, currency prices, especially in relation to the Euro, are sure to remain volatile over the next little while. Here are 3 safety measures all Forex traders should put in place to avoid significant financial loss:
1) Lower Your Leverage Ratios
Leverage, as is widely known, can significantly enhance your trading profits. Ordinarily in the world of Forex trading where currency price fluctuations are rarely greater than 1% a day, leverage is extremely important. While risky, it is not as dicey utilising leverage for equities, futures or options trading where intra-day prices can appreciate or depreciate much more rapidly. In a period of crisis such as the potential “Grexit” as mentioned before, currency prices can move wildly and unexpectedly. Therefore, to reduce you exposure to significant loss, don’t take on as much leverage. Many Forex brokers allow you to reduce your leverage. Leverage levels in excess of 2-300:1 are for expert traders who can afford to take great risk. However, during high volatility, even the experts try to protect themselves by reducing their trade sizes.
2) Avoid Trading The Euro
Price volatility and uncertainty has seemed to follow the Euro and other currencies pegged to it for some time. In fact the Forex industry was left reeling in the wake of the Swiss Franc crisis in January when the Swiss Central bank removed its currency ceiling on the Euro and it appreciated nearly 40%. The huge movement caused massive fallout and many Forex brokers such as Alpari and Global Brokers NZ became insolvent. With the effects of the January, Euro related crisis still being felt; companies such as FXCM are still recovering, it could be a good idea to avoid trading the Euro altogether for a little while.
3) Take Advantage of Guaranteed Stop Loss
If you are planning on taking a ride on the wild side and you can’t help but trade the Euro, make sure to take advantage of stop losses! Not every Forex broker operating in Australia boasts a guaranteed stop loss feature and it is highly advised to open an account with a broker that does. A guaranteed stop puts an exact or absolute limit on the potential losses that could arise if market prices move against your bet. As mentioned above, leverage can work against you just as quickly as it can compound your gains.
How does a guaranteed stop loss differ from regular stop loss you might ask? A normal stop loss is usually not exempt from slippage which is the difference between where an actual order is placed and eventually filled. A guaranteed stop outlines a fail-safe sale price in the event a currency bet moved against you. The price cannot drop below your guaranteed stop and could protect you from financial disaster in unforeseen situations.
Another strategy that can also help to reduce your risk exposure is to open an account with a broker that boasts a “negative balance protection” feature.
Volatility is often a currency trader’s friend. However, it is advised to tread carefully over the next few months until markets settle down in the wake of this latest European debt crisis. Use our Forex broker comparison charts wisely and select a broker that is right for you.