There’s no precedent for how to handle today’s upheaval to businesses, and nothing prepared us for how to operate during a global pandemic. But business continues, and companies are finding ways to hedge risk and manage volatility and risk in today’s uncertain market.
There are many different techniques you can use. This article will focus on market orders: what they are, advantages to using them, and how they can help your business counter volatility in the currency markets.
What is a Market Order?
Market orders are a way to trade in the FX market and take advantage of times when the currency rates swing favorably in your direction, while at the same time, minimizing your risk by setting parameters for when you trade. They also let you take advantage of rates that happen when you’re not available to make a trade, so you can make favorable currency trades any time of the day or night.
With a market order, you place an order to buy or sell currency at a specified target rate. Once you set the target rate, you can also set an expiration date on the order. Alternately, you can simply cancel the order if you no longer want to execute it.
If the market rate hits your specified rate before the market order expires, an automatic trigger goes out to the market to buy (or sell) that currency for you.
Advantages of Market Orders
Market orders work somewhat like alarm clocks. Once you set your parameters, the order will execute if the conditions are met, or else you can let it expire or cancel it. The automatic nature of market orders allows you to take advantage of currency moves without watching the market.
These trades are also completely automatic once you set them. The order will be filled at any time of the day or night, as long as the rate hits your specifications. You don’t have to be in front of your computer to execute or approve the trade. That means if the currency market moves while you’re asleep and hits your target, your order will execute.
A market order also lets you take advantage of fluctuations that occur around economic news but that only last for a few minutes. Often, market volatility can increase for a short time after news is released. The volatility can cause currencies to fluctuate by up to a percentage point or two, but these fluctuations may only last up to 15 to 20 minutes. When you set a market order, you don’t need to be watching the news to take advantage of the opportunity. If the rate hits your target, the order will execute.
When Would You Use Market Orders?
This type of currency trading works well for businesses that have larger built-in margins, such as international lawyers, certain retailers, or beverage importers. If a business has cash reserves excess to its needs, that cash can be traded in the currency market.
Market orders also allow the business to protect against excessive losses by setting the parameters that are within its risk tolerance. Businesses with tight margins, such as food importers, can also use market orders to reduce risk. These businesses may opt to set a market order with both a worst case and best case scenario. This allows them to take advantage of rates when the market swings the way they want, with the potential to make money. But if the market swings the opposite way, they won’t exceed what they’ve budgeted for the trade.
Even if your business is outside of these two examples, market orders may still help you manage risk. One of the major conveniences of market orders is that they allow you to take advantage of market movements any time of the day or night. This flexibility lets you put extra cash from your business to work, with minimal time involved, while minimizing your volatility risk.
Overall, market orders are just another tool that your business can utilize to hedge risk in the current volatile economy. There are many other tools that can help you cope with volatility. Here at TEMPUS, our FX experts are ready to advise you on the best strategies for your business.
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