Controlling Risk by Limiting Market Exposure

risk control in a managed portfolio by reducing market exposure

A money manager can limit the amount of market risk a portfolio is exposed to by using stop loss orders on open positions. Even though our managed account program also employs stops, it adds an additional degree of risk control by reducing the amount of time a trade is open.

In order to achieve this, it doesn’t attempt to predict what prices will do in the long term, like many traditional, trend-following programs do. Instead, it looks for specific, high probability setups that only last for a relatively short period of time based on adaptive momentum breakout principles. Since these type opportunities are transient in nature, the positions remain open sometimes for minutes, allowing the portfolio to stay uninvested most of the times. While on the sidelines, the investment is immune to the unpredictable fluctuations of the market.

Example of a Euro Trade – A Lesson in Risk Control

The stream of EURUSD trades below occurred between April 24th and May 8th, 2014. The “Duration” column provides the amount of time each position remained open (from Open to Close time). Out of the 10 trades on the list, 8 were winners and 2 were losers. With the exception of one losing trade that took 58 minutes to trigger the protective stop associated with it, the remaining trades were active for only minutes – with one particular trade closed for a profit of 4.7 pips in 18 seconds and another making 5.7 pips in one minute.

risk reduction eurusd managed account

Many investors ask if these trading opportunities occur every day. The answer is “no.” See below.

How Many Trading Opportunities Exist That Meet the Risk Requirements?

Remember that the objective of the managed forex program is to control risk by limiting the time it remains invested in the market. It is not just supposed to trade for the sake of trading. Opportunities like the one shown above don’t occur every day. The market opportunities that the program exploits do not materialize on a daily basis. The strategy is also very selective and many conditions must be met before the trigger is pulled. Overtrading would only lead to unnecessary losses and commissions in the portfolio.

If you are interested in the unique way the program controls risk and would like to obtain the latest performance numbers, please click on the green button below and complete our short form. To discuss the selection of the broker to manage your account, please contact us.

Managed FX Information