Forex Glossary Archives - Forex Education

Understanding Currency Interest Rate Differentials

The interest rate differential has defined as the difference in the interest rates for each of the two currencies in the currency pair. Each currency has its own interest rate and the difference between the interest rates are the rate differential. In foreign exchange (forex) markets, the differentials or forex interest rate differentials are of interest since they affect the pricing of a particular currency. Purchasing a currency which is having a higher interest rate is profitable, since the trader will get daily interest payments. This forex purchase is defined as carry trade or earning carry on the rate differential. Since 2010, changes in the economies worldwide, have resulted in negative interest rates in some countries and people are more interested in the differentials in interest rate.

For example, you plan to buy or sell the USD/JPY for 2-years. You will either receive 2.68% when you try to buy the dollar or pay away 2.68% if you buy the yen and sell the dollar. This exchange differential exist because the 2-year US rate is 2.50% and the Japanese 2-year yield is -0.18%. If you buy the US dollar and nothing happens for 2-years you will earn 2.68%. If you buy the Japanese yen currency pair and sell the dollar and nothing happens for 2-years you will lose 2.68%. This example is based on interest rate differential.

Negative interest rates

Since 2014, economists have noticed a major difference in the interest rates for the economies of developed countries and the economies in emerging markets. The economies in developed countries reduced their interest rates to below zero, in an attempt to increase demand for products and services. On the other hand, the emerging market countries increased their interest rates, hoping to prevent instability in the economy and reduce the outflow of capital. For example, in February 2016, Banxico, the central bank of Mexico, in an emergency meeting decided to increase the rate for borrowing by 50 basis points. It also sold United States dollars at the applicable market rate, to increase the demand for the Mexican peso, whose value was falling. This decision increase the difference in the interest rates of Mexico and the United States. The market interpreted this decision by the central bank, as a sign of desperation or instability to prevent chaos in the global market. This is how forex interest rate differentials can change a lot of things.

Carry trade

Forex traders try to take advantage of the below-zero interest rates in some countries with carry trade. The forex traders are selling currencies having negative interest rates like the euros and Japanese yen and using the money to purchase currencies with a high-interest rate like the Indian rupee, Mexican peso, South African rand, or the Turkish lira. Theoretically, these trades may appear very profitable, due to the very large differentials in the interest rates of the countries. However, in reality, these may become extremely risky if the economic problems in the emerging markets continue or worsen.

Forex traders should be aware that historically it is observed that there is often a change in the spread for the currency pair, and this could neutralize the interest which the forex trader is making due to carry trade for the forex pair. Rate differentials are usually widening because the risk is creating problems for the borrowers in the countries. New forex traders should be cautious while considering carry trade since it is fairly risky. In 2019, there have frequent fluctuations in the commodity rates, and trade disputes between the US and China have adversely affected the yield for some of the currencies having higher interest rates. Also, uncertainty about the future has led to an increase in investment, the flow of funds to countries which have low or negative interest rates

How to Calculate Risk Reward Ratio in Forex

by Fxigor

The Complete Guide to Risk Reward Ratio

The risk-reward ratio is noted as conducting measures concerning the level of the reward that you could potentially achieve when you conduct a trade-in correlation to each dollar that you are willing to put up to risk. Take into consideration, for example, that if the risk-reward ratio is shown to be 1:3, this provides the indication that you are willing to put up one dollar to risk in order to gain three dollars in reward. Or if the risk-reward ratio is set forth as being 1:5, this denotes the fact that you are willing to put forth one dollar up to risk in an effort to make a profit of five dollars.

The next question is how to calculate the risk-reward ratio in forex? The best way to calculate the risk-reward ratio in the forex is to use pips as a measure from entry point till stop loss and target.

Risk-reward ratio = absolute value (Price entry value – stop loss value) / absolute value (Price entry value – target price value)

For example if we buy EURUSD and entry price is 1.3 and stop loss is 1.2 and the target is 1.5 then:

(Entry price – stop-loss) = 100 pips (because from 1.3 till 1.2 there are 100 pips.)
(Entry price – target price) = 200 pips (because from 1.3 till 1.5 there are 200 pips.)

Risk reward ratio = 100/200= 1/2. Risk is 1 and reward 2, 1:2.

This is the best way how to calculate the risk-reward ratio in trading.

Risk reward ratio myth

I listen to all the time expressions – High-risk high reward!

What is the relationship between risk and reward in investing anyway?
The risk-return spectrum says that the risk-reward is the relationship between the amount of return gained on an investment and the amount of risk undertaken in that investment. This rule exists in all kinds of business, not just forex. A lot of traders seeking low-risk trades where they try to risk a few pips and to achieve high returns. The problem with this approach is the very low winning rate. Psihologicly this can be very stressful for traders.

Some people may be fooled by the risk-reward ratio and do not really know what it is or do not understand it well. If you are used to seeking trades that possess a risk-reward ratio of 1:2, you could likely continue to be the loser every time.

It is realized that when a trader seeks for trades that tend to possess a risk-reward ratio that is lower than 1, the trader can potentially continue to be profitable in a consistent manner. Then this leads one to ask why this is so. This is due to the fact that the risk-reward ratio is only one factor relating to the success that is achieved.

Now in terms of the lie that you have been given in regard to the risk-reward ratio, likely you have been told that you must possess a risk-reward ratio that is set at 1:2. But that is not true at all. This is based on the premise that the risk-reward ratio does not carry much merit on its own. Take into consideration, for example, that the risk-reward ratio has been set at 1:2. This indicates that every trade that you are perceived as winning will yield for you two dollars in profits. However, the fact is that your winning rate may only be twenty percent. This means that when you have engaged in ten trades, you may win only two trades and you result in losing the other remaining eight trades.

As a result, when the math is completed, this denotes that your total loss is in the amount of eight dollars and your total gain is in the amount of four dollars. Thus, it is determined that your net loss is in the amount of four dollars.

With this being the case, it is highly evident that it is imperative to comprehend that it is fruitless to apply the usage of the risk-reward ratio by itself as a metric. Rather, it is needful to engage in the combining of the risk-reward ratio in conjunction with your winning rate in order to be able to achieve a determination concerning if you will make profits in the long term–which is also referred to as your expectancy.

How to use the risk-reward ratio to be profitable

Risk reward ratio traders need to use together with the Winning ratio and Kelly ratio to create better position size and improve trading performance. If you use 1:5 risk-reward ratio and your winning ratio is 3% it is bad, even you have a great risk-reward ratio.

You need to know the secret in order to be profitable. Thus, you must divide the size of your winning by the size of your average loss and add one to it. Then you are to multiply this by your winning rate and then subtract one from this. This will determine your expectancy when you are conducting trades.

In a scenario where you conduct ten trades, six are counted as winning trades. On the other hand, four are counted as losing trades. Therefore, the result is that your winning percentage ratio is expressed as sixty percent or as six over ten. Then if the case is that six winning trades equated to grant you profits in the amount of three thousand dollars, it is commonly understood that your average win is regarded as being the amount of five hundred dollars. This is derived by dividing the number of profits of three thousand dollars by the number of winning trades which were determined to be six wins.

On this website, we wrote two articles: Money management expert advisor and How do you Profit from Forex Trading?. In both articles we are taling about Kelly ratio

Position size = Winrate – ( 1- Winrate / Risk reward Ratio)

In such a case that four of the trades were losses that equated to a total of one thousand and six hundred dollars, this means that your average loss is determined to be four hundred dollars. This was derived by dividing the total amount of money that was lost by the number of your losing trades.

Now it is time to apply this to the formula that was addressed previously. Thus, you will divide your winning trade average by the losing trade average and you will then add one to this amount. Then you will multiply that by the percentage of your winning trades and minus 1 from the amount. Thus, the result is that your determined expectancy is considered to be 0.35 or it may be expressed as thirty-five percent. This is regarded as being a rather positive expectancy. This means that you will likely receive thirty-five cents for every dollar that you trade over the long term.

Thus, it is realized that the truth is that there really is no foundational minimum risk-reward ratio of 1:2. This is because of the fact that one may possess a risk-reward ratio that is set at 1:0.5; yet, if the person possesses a high enough winning rate, then the trader will still result in gaining profits over the long term.

With this being the case, the primary metric for consideration in terms of importance is not to be viewed as being the risk-reward ratio. Further, it is not to be viewed as being your winning rate. Rather, the most important factor to consider in terms of metrics at this point is your expectancy rate.

With this perspective in place, it is realized that it is not a good idea to engage in the placement of a stop loss at a rate that is considered to be arbitrary, such as one hundred pips up to three hundred pips, as this effort would not really result in making much sense. But rather, it is believed that it is best to engage in leaning against the factors of the markets that serve as barriers, as they engage in the prevention of the price point from aiming at landing on your stops.

Day Trading with Risk/Reward Ratios and Win Rate

So, what is a good risk-reward ratio? The good risk-reward ratio is the ratio which with a combination winning rate gives the best profit. So alone without other rates, the risk-reward ratio is not an important parameter.

If your trading strategy offers you more trades then it can be sensible to consider that you are losing profits. By the day’s end winning trades may not always end up with profits,

The worth of losses and wins should be assessed by the day trades on the basis of their risk-reward ratio, the ratio of win-loss, acceptable risks, and losses while creating ask or bid.

To be a successful day trader, you can generate equilibrium between the risk-reward ratio and the ratio of win-rate by considering all the elements. Your risk-reward ratio should be 1.0 if the win rate is higher like 60-70% and for a win rate 40-50% it should be around 0.69-0.65.

The ratio of win/loss for Day Trading

In order to win almost all the trades, the focus of most day-traders remains on the ratio of win/loss or win-rate. Though it is a sensible move, it does not ensure that the win-rate is profitable or the success of the trader.

Win rate is the number of trades won from all the trades made by you. For instance, your win rate will be 60% if you win 3 trades out of 5.

When you divide your wins by losses then you can get your ratio of win-loss. For instance, 1.5 will be the win-loss ratio if you win 60 trades and lose 40.

So, it will be favorable for you if your win rate is more than 50% and the ratio of win-loss 1.5. But it does not assure you to make you a successful day trader because the value of the loss is more than the value of wins.

Risk/Reward Ratio in day trading

The ratio of risk-reward depends upon the amount you expect to earn from trade and how much you can lose willingly.

By using signals and patterns of the trade, day traders usually quickly enter and exit the market. So they will have to attach a stop-loss clause with every trade to show the risk you can take.

For instance, if you are trading for $10.00 then $9.90 will be your stop-loss position if you are ready for the loss of $0.10.

However, to balance your risk you will have to establish your expected pay-off with the help of your targeted profits.

Analysis of risk-reward ratio

For instance, $0.20 will be your expected profit if you expect the rise in its price up to $10.20.

In this situation, your reward will be twice your expected losses. So, 0.5 will be your risk/reward ratio.

For day traders, a preferable situation is with a lower ratio of risk/reward as it can maximize their profits.

Balancing between risk/reward and win rate

A balance in risk-reward and win rate is necessary for day traders. With a very high risk/reward ratio, a high win rate is useless. Similarly, a higher ratio of risk/reward is worthless with a very low win rate.

You will have to consider the following strategies:

It can be a profitable situation for you if with a higher win rate your risk/reward ratio is high.

You can still earn profits if your ratio of risk/reward and win rate is low.

Peak ratios in day trading

A trading strategy should be made by the traders to win trades between 50-70% as they have to trade in all conditions. Winning more trades can reduce their profitability.

They should also maintain the ratio of risk/reward of less than 1.0 to make profits.

So you should neither have a very low-risk reward ratio nor a very high win rate to earn profits.

How Do You Trade Fibonacci Expansion Levels ?

by Fxigor

Fibonacci Expansion Levels

Fibonacci Expansion Levels are lines in technical analysis, calculated as the percentage between high and low price, which can be drawn above the highest high or below lowest low price level. Fibonacci levels are always projection levels.
Fibonacci Expansion Levels or Fibonacci Extension levels follow the same logic as Fibonacci retracements.
The most common levels used for Fibonacci Expansion levels are 1.618% and than 2.618% (some traders use 123.6%; 138.2%, 150.0%, 161.8%, 200% and 261.8%)
The most common levels used for Fibonacci retracements are 23.6%, 38.2%, 61.8%.

Main Facts about Fibonacci Expansion (Extension) levels and Fibonacci retracements

When it comes to technical analysis, the term that refers to any area of resistance of support is known as a Fibonacci retracement. It will also use a horizontal line in order to point where there might be resistance or support and each of those levels will be labeled using percentages. That percentage amount is a pricing amount that has moved and been retraced. The levels that happen within Fibonacci retracements are 78.6%, 61.8%, 38.2%, 23.6%, while even though it may not be official 50% can be used.

This is considered to be useful due to it being able to show highs and lows between different price points and this creates the known level between the selected points.

For instance, if the price started out at $10, and it suddenly drops to $3.82, then it has done a retrace and this percentage is a retraced 38.2%, which is a number of the Fibonacci retracement. These particular sets of numbers can be found everywhere in nature, so it is believed that these particular numbers are relevant within the financial market.

Formula Used to Find the Fibonacci Expansion (Extension) and Retracement Levels
An indicator will not have a formula, so whenever a trader applies an indicator to charts and two points are picked, once selected, the lines that are drawn will show the moving percentage.

For instance, if there is a price that goes from $15 to $20, and the two prices are what have been selected to find the indicator, then simply multiply the amount difference between the two prices by the Fibonacci Retracement percentages to find the levels. Therefore, you would take $20 – ($5 X 0.5) = $17.50 and so on.

If a trader wanted to calculate the levels, you would follow the formula listed above and use the percentage of a particular price range that has been selected.
However, many ask where these particular sets of numbers originate from. They are all based on what is known as the Golden Ratio.
If a person was to create a specific number sequence that began with the number zero, then added one, and eventually just continuously adding the first two numbers, this string of numbers would just continue indefinitely. For instance, it would look something like this:

0+1 = 1, 1+1=2, 1+2 = 3, 3+2 = 5, 5+3=8, 8+5 =13, 13+8=21, 21+13 = 34, 34+21=55, 55+34=89, and it would continue on just like this. The sums would make up the entire string of numbers and would go on indefinitely.

All of the levels are going to come from this string of numbers, however, this excludes the first very few numbers so when the string is going, if the number is divided by the number that comes next, you will end up with the level numbers. However, taking time to carefully explore these options, a person would notice that all of these percentages, except for 50% will be considered to be a true Fibonacci number as 50% is not seen to be an official percentage. All of these percentages will be based on math calculations based on this particular number string.

Another interesting thing about the Golden Ratio, is that 1.618 or 0.618 can be located within galaxy formations, historical architecture and artifacts, shells and even in sunflowers.

What Do the Levels Say?

The Fibonacci retracements are able to be used in order to find out the levels of stop-loss, help to set target prices and place entry orders. If a trader notices that a stock is moving up and after it moves it ends up with a 61.8% retrace and then it begins to bounce once again. Because the bounce was considered to be at a level on the Fibonacci scale, and if the trend stays for a long time, then a trader may decide to buy. This means that a trader could create a stop loss within the 78.6% level or 100% where it originally started.

These levels can also be utilized in various types of technical analysis. For instance, they are seen in the Elliott Wave theory and Gartley patterns. After a price has moved down or up significantly, when a price starts to retrace its path, which it seems to always do, these analyses will find the retrace and notice that it reverses to certain levels.
These levels are often at a static price that will not change often, unlike a moving average. In order to easily and quickly identify price levels, a static nature will be needed. This allows investors and traders to react and anticipate when a level may be tested. The levels will often be an inflection point, which may indicate where a price action could be expected, whether it be a break or a rejection.

How Do You Trade Fibonacci Expansion Levels?

The simple strategy is to use the highest high and lowest low and add Fib levels using MT4 platform :

If you pick Fib. levels retracements or Expansion levels you will get in both cases expansion levels. Expansion levels tool will give you only 2 most common levels for your target.

So your strategy can be for SELL TRADE :
Step 1: Pick low and high on the chart.
Step 2: If you see that the price on hourly close is below 61.8% Fibonacci retracement than make SELL trade.
Step 3: Put stop loss on High Price.
Step 4: Set your target to be either 161.8% expansion level or 200% expansion level or 268.1% expansion level.

OR you can cut a small number of lots on each target and move stop loss whatever you like.

See this strategy for sell trade on the image below:

Differences Between Expansions (Extensions) and Retracements levels

The Fibonacci extensions are the percentages that go back to a trending direction while the retracements are the percentages that pullback. For instance, if you have a stock that increases from $5 all the way up to $10, but then it goes back down to $6.75, then it is considered to be a retracement, but if that price happens to increase up to $16, then it is called an extension.
Level Limitations
Even though retracement levels can show where a price may potentially find resistance or support, there are not any assurances that this particular price will stop at that point. This can be seen as a reason as to why a trader should look for other signals that may be utilized, such as prices bouncing off of a particular level.

Another argument against a retracement level is that, due to there being several levels, the price could possibly reverse near one of these levels and this can happen a lot more often than it would not. The overall problem being that a trader could possibly struggle to locate which one that would be useful during any retracement that may be happening at that point and is being analyzed.
The Key Takeaways
An indicator connects two points that a trader will view as being relevant, which is often a low and high point. Once an indicator has been selected and drawn on the chart, these levels will be considered as fixed and will not change. The percentages that are provided will be locations where pricing may reverse or stall. A trader should not solely rely on the levels. For instance, it is detrimental to assume that a price will reverse after hitting a particular Fibonacci level. It could, but then it may not.

A Fibonacci retracement level can be used to show areas of interest that may show potential. If traders are looking to buy, they will watch to see if price stalls at a Fibonacci level and wait for it to bounce off that particular level before they decide to buy at all.
The ratios that are the most commonly used will include 78.6%, 61.8%, 38.2%, 23.6%, while 50% is seen to be an unofficial retracement level. These percentages will show how much of a previous move was made, whether it be retracted or corrected.

What Does Take Profit Mean in Forex?

by Fxigor

Take profit or stop profit order is order information which tells the broker to close your position when the price reaches a specified target price level in profit. So, a take profit order closes your trade once it reaches the price level of profit. When your take profit order is hit on a trade, the trade is closed at the current market value. For example, if your Buy price is $1.1 and your target price is $1.2, then you take profit price when your trade reaches $1.2.

In this image above 1.2 is take profit order.

The foreign exchange (forex) rates are unpredictable, they can increase or decrease any time. Since it is usually difficult for the forex trader to monitor the forex rates continuously, one of the options to automate forex trading is using the Take profit forex strategy. The order to take profit is executed after the trade has reached the specified profit level at the market price. These orders also call limit orders.

Take profit forex strategy

The risk-reward ratio for the trader is defined in terms of the stop loss and take profit levels for the order. Some of the most important factors which determine how successful a forex trader is are the size of the trade and the ratio of the risk to the reward. The take profit order ensures that the exposure of the forex trader is limited, and he exits the market as soon as he gets the price he wants, and not taking the risk of remain invested for a longer period. For short term trading, it is better to use a take profit strategy.

If the short term forex trader does not have a target for taking profit, they may find that the profit they are looking for has disappeared because they did not exist at the right time. Many forex traders are using the average true range or pivot points for defining the right level for taking profit forex-order. For intraday forex trading the target is usually calculated using the true range average and adding the extreme overnight to it. Alternately the weekly or daily pivot points are also used. These levels are usually the extreme levels for the market and the market can retrace its levels.

How to take profit in forex trading
Take profit price can be :
1) Previous low and high prices. For example, yesterday’s high or weekly high or weekly close can be interesting “take profit price level”.
2) Fib level can be an interesting target level.
3) The regression formula prediction price level can be the target level.
4) Pattern recognition and levels based on pattern levels.

Placing a take profit type order

The experience and risk profile of every forex trader varies, so not everyone will find that the take profit option is ideal for forex trading. Many long term traders are interested in taking advantage of the trends in the long term. These traders may feel frustrated when they exited very early despite predicting the trend accurately because of their take profit trading. When the forex rates are fluctuating between specified ranges, take profit is a better strategy. This is because the resistance levels for the forex pair, ensure that the price does not increase beyond the specified level, and support levels, limit the decrease in forex rates. Hence if a forex trader is purchasing forex at the low rates, and waits till the resistance level is reached, a take-profit order is recommended since the rates are again likely to decline to the lower rates in the range-bound market

Indicator for deciding trading strategy

Forex traders can use many indicators like the relative strength index, moving average to determine the trends in the forex market. The average directional index (ADX) is one of the most popular indices among the new forex traders. The value of the ADX varies from 0 to 100 and determines how strong the trends for the forex pair are. If the level is above 30, the pair is trending strongly, and a stop profit is not recommended. If the ADX value is below 30, it indicates that the forex market is ranging. It is better to place an order for taking profit, instead of trying to time the exit correctly.

Systematic Risk in Detail

by Fxigor

What is the systematic risk of investments?

Companies and investors face different kinds of risks that affect their profit or returns on their investment. The systematic risk is the risk caused due to macroeconomic factors affecting the economy that cannot be controlled by either the companies or investors. As a result of this risk, the returns which are earned from investments that are risky will fluctuate. Some factors which affect the profit of a business can be controlled by the business and its management to some extent and are the unsystematic risk of doing business. These factors include labor disputes and mismanagement for a company. The total risk involved for investors can be categorized into unsystematic risk and systematic risk.

Systematic Risk explained

Many unexpected events occur regularly which cannot be controlled by the investors and these are the systematic risk of doing business, investing. This risk can be only avoided by avoiding any investment which is risky. In reality, this is not a viable option for most investors since the only investment options available to them, in this case, would be the CDs and T-bills of government-related organizations. Hence every investor should be prepared to consider these systematic risks while deciding their strategy for investment if they want good returns.

To compensate for the systematic risks while investing, most investors will expect a premium on their risky investments. To explain with an example, if 5% return is offered for a T-bill which is risk-free, the investor will expect 10% returns while investing in shares. The investor hopes that the additional 5% return on shares will compensate for the systematic risk he is taking while investing in shares. Due to macroeconomic factors, the investor can also make a loss on his share investment and this is why he tries to get better returns.

Systematic risk should be considered the opportunity cost of choosing a particular investment when less risky options are available. Investors consider their personal choices and also financial goals while choosing their investment options. For a T-bill with a 3% return, though the returns are low, there is no systematic or other risks for the investor. On the other hand, for a stock offering 15% returns, it is possible that the investor will lose his money, and there is also the opportunity cost which should be considered when he chooses this option compared to the low-risk option of T-bill.

It is usually not possible for investors to avoid all systematic risks if they wish to get good returns. However, they can reduce the systematic risk involved by diversifying the investment. This ensures that even if they make a loss from one investment, the profits from other investments will compensate for the loss. Additionally ensuring that resources are utilized properly and procedures are followed to ensure that only quality investments are chosen, can greatly reduce the risk involved. When a company is being sold, it is important to consider the systematic risk involved since the buyer will be willing to pay a lower amount for the business to compensate for the risk involved in the deal.

Managing Systematic Risk and Unsystematic Risk

Investing money is risky, the investor may lose some of their money. Experts believe that the greatest risk for investors is losing their capital amount permanently. Hence to avoid losing their capital completely, investors have to adopt a strategy for managing the risk for their investment portfolio. For this, they will have to understand how unsystematic and systematic risk will affect their portfolio. They will also have to find out the most effective way of reducing the risks involved in their investment.

Systematic risk is related to a large number of factors affecting the entire investment market, it is not related to a specific risk related to a particular investment. Changes in the bank and other interest rates, inflation, fluctuation in currency exchange rates, wars, recession are some of the macroeconomic factors that affect the systematic risk. These macroeconomic factors affect both the direction in which the market moves and the volatility. The systematic risk cannot be controlled by a single company or individual.

Asset allocation is widely used to reduce the systematic risk involved to some extent. Since the value of asset categories will change in a different manner to changes in macroeconomic data, investors can reduce the volatility in their portfolio by investing in asset classes with a low correlation to each other. When the value of some asset categories like domestic equities, stocks, are increasing, others like bonds, cash will decrease in value and vice versa to reduce volatility. Experts also believe that they should consider the value of the assets while investing. They should invest more in bargains, and avoid investing in assets that are considered overpriced. To reduce systematic risk, they should also invest in cash which is often not appreciated.

Unsystematic Risk

Risk which is specific to a company or industry is considered an unsystematic risk. This risk can be attributed to a specific investment or investment group. It is not linked to the returns from the stock market. It also called the diversifiable, residual or specific risk. These risks can be controlled to some extent by the industry sector or company. These risks are divided into financing, business, credit, product, legal, liquidity, political and other risks. Unsystematic risk can be almost completed eliminated by diversification. The investor with only one stock or bond will suffer great losses if there is a problem with the stock. On the other hand, if the investor has a diversified portfolio of 40 different investments, the losses to problems in a particular stock will affect the portfolio less.

Probability, Expected Portfolio Value

For calculating the expected value of a portfolio, the possible returns and probability of each return will be considered. One way to measure risk is determining the deviation and how the probability of the deviation compares with the expected returns. Diversification reduces the unsystematic risk and portfolio risk is mitigated by allocating assets properly. Mitigating risk ensures that the portfolio manager has more profitable assets with higher risks resulting in portfolio optimization. The portfolio manager can handle a specific amount of risk and if the systematic and unsystematic risk are lowered, he can opt for investments offering higher returns.

Systemic vs. Systematic Risk: What’s the Difference?

In order to understand systemic vs. systematic risk both of these terms a bit more closely. If an event causes a major setback to an economy or a particular industry then it is known as a Systemic Risk but if the market experiences a consistent and everlasting risk for an extended time due to a number of reasons then it is known as Systematic Risk. The information provided in this write-up will help you in understanding the basic differences in these two terms.

Difference between systemic risk and systematic risk

Systemic risk can give a complete shock to the system from outside whereas the shock provided by the systematic risk based on a number of factors can be ongoing and on a day-to-day basis. For instance, the financial crisis of 2008 that has triggered massive implosion in the world market was based on the threat of failure of one of the major banks of the US. It is a good example of systemic risk. The risks based on the changes in interest rates, corporate health, geopolitical issues, etc. are some of the examples of systematic risk.

Moreover, it is hard to predict and scale the systemic risks whereas in some cases it is easier to predict and scale systematic risks

Systemic risk can be defined as the risk related to the complete breakdown of a sector, industry, financial institution, business, financial system or the entire economy. Some of the small but particular problems like leakage of information of website users or flaws in the security of bank accounts etc. can also come in the category of systemic risks. In other words, systemic risk can be defined as a substantial danger occurred in a company that can widely influence the entire financial system.

Systematic Risk, on the other hand, is not easy to define as it is a bit vague. In simple words, it can also be used as the term market risk’ which involves the dangers faced by the entire market and is not easy to resolve even if you spread your holding into several branches. The basis of such widespread risks for the market can be the period of weakness or recession in the economy, decline or rise in interest rates, wars, fluctuations in the prices of the commodities or currencies, etc. However, the systematic risk can be managed but cannot be eliminated by following the strategy of allocating the assets in different ways.

Some examples of systemic vs systematic risks

In 2008, the failure of Lehman Brothers that has affected the entire economy and financial system is one of the most recent examples of systemic risk. This failure has caused a domino effect on the financial system of the entire world because Lehman Brothers was a big company. The government has to intervene to resolve this problem.

One of the latest examples of systematic risk is the economic recession faced by the entire world in the late 2000s. at that time, people who have invested in the market, have seen drastic changes in the value of their investments due to this economic crisis. The assets of different classes were affected differently due to this recession.

Thus, systemic risks are basically different from systematic risks.

Fibonacci Expansion Levels

Main Facts about Fibonacci Expansion (Extension) levels and Fibonacci retracements

What Do the Levels Say?

How Do You Trade Fibonacci Expansion Levels?

Differences Between Expansions (Extensions) and Retracements levels

Main Forex Info

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