Risk Management Techniques Popular With Argentine Investors

All traders sooner or later learn that the market will rob those who are not ready to defend it, and in Argentina that lesson comes sooner and more savagely than in most other countries. The economic climate in the country has also served as a fast-tracked curriculum in financial self-preservation that condenses lessons that would otherwise take a decade to develop in a more benign economic market into weeks or months. The intuition regarding risk acquired by investors after surviving a series of devaluation cycles, capital controls and unannounced policy reversals is hard-won and cannot be acquired by reading alone. One thing that has come out of this shared experience is a set of effective risk management methods that are a reflection of the best practices in the world as well as the needs of working in one of the most financially unstable environments in the world.

Stop-loss discipline holds a place of almost religious significance in the discourse that experienced Argentine traders use when teaching novices. The idea behind it is rather easy, as it involves the greatest loss that one can accept on a position and leave beforehand, but the psychological aspect of it is hardly that. Markets do tend to reach stop levels and then turn back to give the impression that a few more days would have been the correct decision. The traders who have been duped by that perception talk about how they later found themselves treating their stop-loss as an obligation and not an acknowledgment, a boundary line that emotion cannot cross and thus are resistant to the rationalizations that stress creates in the situation. Some trading groups in Buenos Aires have established a standard of having stop-loss review as a compulsory part of their weekly trading analysis meetings, and they take undisciplined exits as seriously as they take losing trades.

Correlation awareness is an advanced risk management tool that has evolved amongst Argentine investors who hold multiple positions in related asset classes simultaneously. When two positions react to the same underlying driver, owning both of them would be exposed to concentration risk that would be unnoticed by a superficial examination of the portfolio. An investor who is long dollar denominated and short on the peso at the same time may be diversified in theory but in practice is having a large single directional bet with a variety of instruments. It has come to be considered a sign of advanced thinking among those who have been in the business long enough to realize that true diversification involves appreciating some relationship between the assets and not merely collecting divergent ones.

Keeping an elaborate trading journal is no longer a suggestion that a beginner is told and disregards, but rather an action that intermediate and advanced traders in the Argentine community practice and proselytize about. The journal will serve various traders with some having an emphasis on the technical reasoning behind each action, others monitoring emotional states and price levels and others creating statistical data which enables them to discover the setups that create positive expectancy under large samples. What the practice has in common with its variants is the emphasis on accountability, on the necessity of establishing a record unalterable by the vagaries of memory that sweetens failures and exaggerates achievements. The traders who keep journals will always report a clearer picture of the patterns they were using and the exact circumstances under which their judgment begins to decline.

Perhaps there has been no single aspect of risk to raise more cautionary stories in the Argentine forex trading community than leverage management. The power to trade large books with comparatively minimal capital is the attribute which initially tempts many retail operators to currency markets, yet is also the process by which accounts are ruined at dizzying rates. Veterans are more likely to discuss leverage in terms of the reverence one would give to something that is actually dangerous, with the understanding that it is useful but the excessive application of leverage is a vice of character rather than an act of bravery. The traders who have survived longest in Argentine markets are inclined to exercise leverage conservatively compared to that which their brokers allow, and to think of the highest possible limit as only the reckless course but never as an objective to aim at.

Psychological capital has come to the risk management discussion slowly and in a manner that purely technical frameworks could never fit. The appreciation that the psychological and emotional condition of a trader is a direct indicator of the quality of decisions made has led some of the more considered market players in Argentina to take recovery practices into their trading habits with the same weight they give to chart analysis. Planned pauses following losing sessions, strict principles regarding not trading when one is in a state of personal distress, and conscious consideration of sleep and physical health have all been integrated into the risk management ideologies of traders who have been able to draw the links between life outside of the screen and performance on the screen. Handling the risk of forex trading, in this broader sense, goes far beyond position sizing and stopping placement into the realm of sustainable human performance, a fact that the greatest tool any trader can rely on is themselves after all.