Foreign Exchange Risk Management Forex Risk Management
Morning Briefing
Risk:
Stop and Reverse

            6th June, 2001


SAR (Stop and Reverse) should be used sparingly, only once in a while, when the conditions require it to be used. SAR should NOT be used habitually or even most of the times.


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If your Stop Loss gets hit, it usually means that the market will go against you for some time and for some distance before moving back in your direction again. As such, most of the times, your outlook should be to re-instate your original trade in the original direction, NOT to reverse the direction.

For instance, say you bought Euro at 0.8480 and kept a Stop Loss at 0.8440. After the Stop is hit, the market may decline to 0.8420 only, before moving up again. As such, you would want to try and buy Euro again at 0.8420. If, instead you took a SAR, you would be stuck with a Euro Short at 0.8440 and would (in all probability) not have been able to take profit at 0.8420.

Having said that, sometimes, note Sometimes an SAR can pay good dividends. But, the conditions should be right for that....there should not be any ambiguity in the analysis and there should be good potential for a large enough move in the opposite direction to make the exercise worthwhile.

PLEASE NOTE that in the Evening Edition of "FX Thoughts for the Day" today, we have Stopped out of our Cable Long at 1.4035 and have gone Short at the same level. This is an SAR. The rationale behind this trade is that the chances of an upmove to 1.43 have been negated and the chances of a downmove to 1.3900-1.3850 have increased tremendously. As such, the SAR becomes justified. Also, there is enough room on the downside to make the trade worthwhile. Review note. The short at 1.4035 saw profit at 1.3875 on 7th June, 01.s

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