Review Category : Trading Education

Trade Forex Using Leverage

Trade Forex

Understanding the concept of leverage is essential in trade forex for anyone wishing to trade forex in a highly successful manner. Historically, commercial banks have been the primary participants in the forex industry, with most of their dealers operating on a very short-term “spot” (“now”) basis. This has lead to the development of using very high debt levels to support very quick “day trading” positions and allowing retail accounts to have the same high levels of debt financing (“leverage”). Unfortunately, no one put a “day trade only” sign on these high leverage ratios. So, the public has been allowed to think that you can successful use high leverage ratios for trade forex trading positions that last longer than 1 hour, etc., when nothing could be further from the truth.
When you have a 200:1 leverage ratio, it only takes a 50 pip move to wipe out your cash position. When you have a 100:1 leverage ratio, it only takes a 100 pip move to wipe out your cash position. The AUD/USD moves about 75 pips/day.

Can Leverage Help You Trade Forex?

One of the most unique aspects of forex trading is the very liberal leveraging policies that most trading accounts have. Outside of the US, Canada, Japan and Singapore, it is very common to have leverage ratios of 200:1. To give you some perspective of what this means, 200:1 means that only $1 is anchoring $200 of a trade position (or, to put it another way, if you wanted to buy a house with a 200:1 leverage ratio, you would only have to pay one-half of 1% of the value of the house in the form of a cash deposit). The net result is that you have very little money propelling a relatively huge investment – a “day traders” dream come true.

Be Careful With Leverage As You Trade Forex

Or, it can be a nightmare. Usually the agony starts with the assumption that if day traders can successfully use leverage ratios of 100:1 or 200:1, then so can anyone involved in longer-term trading. Not! The longer you’re in the market – with any kind of trade – the longer you are exposed to both systematic and non-systematic risk. And, if you either forget (or, didn’t know how) to set stop losses, then it’s only a matter of time before your initial cash deposit gets toasted and your cash pile is looking slimmer than before. Leverage is like adding gasoline to a fire. Throw on too much, for too long, and the results will not be pretty. Stick to 50:1 or lower.

Using Leverage Successfully As You Trade Forex

The weekly chart of the EUR/AUD is sporting a 1-year old “rounding bottom” – a lovely bullish pattern that you can attempt to take advantage of through highly leveraged, moving average-based, trading, off of a 5- or 15-minute chart. The reason that you only want to day trade this currency pair is that a long EUR/AUD trade is also implicitly a short AUD trade, making holding such a position relatively expensive (since Australia’s interest rates are so much higher than what’s available in the European Union). So, keep it short and sweet, making sure that you’re out of all positions before you get your beauty sleep. Use an “Awesome Oscillator” to gauge momentum and a “Know Sure Thing” oscillator for signal confirmation.

 

 

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Day Trading On the Foreign Currency Exchange

Foreign Currency Exchange

In the beginning of your forex trading career, you will have to make some very crucial decisions that are going to define what you will do on the foreign currency exchange in the future.

While there are many decisions which are crucial in this regard including your choice of trading course, trading mentor, and forex broker, there is nothing more important than your selection of trading style.

You will find and be relieved to know that the foreign exchange is extremely versatile in that it can support the preferences of virtually every trader because it allows for various trading styles.

One of the styles which seem to suit the majority of new traders in the forex market is that of day trading. Therefore, if you have just decided to start trading on the foreign exchange then you should find out more about day trading because it just might be perfect for you too.

Day Trading Is a Full Time Process

The first thing you should understand is that day trading is a full time process which means that if you are only interested in part time trading then you should look for other trading styles.

In other words, if you have other commitments in life such as another job then you cannot commit to day trading and should try to look up other trading styles which can be used on the foreign currency exchange.

Trades Are Never Left Open Overnight

Day trading is a process where you will never be leaving any trade open overnight. This is an important characteristic because it means that at the end of the day, you will be able to relax and not worry about the fate of your money which is active on the foreign currency exchange. Usually, your positions will be open for anything between a couple of minutes and a whole day.

Day Traders Need to Be Disciplined and Patient

If you are not an inherently disciplined and patient individual and you think that these are qualities that are beyond you, then day trading may not be the right trading style for you.

Discipline and patience is extremely important for day traders on the foreign currency exchange because sometimes they need to wait for the right opportunities and trends to open positions in the market.

Day Trading Is Mainly Based on Technical Analysis

The majority of day trading strategies you will find on the foreign currency exchange will rely primarily on technical analysis because fundamental factors do not play a major role in time periods as short as a single day. However, this also means that you will be spending a lot of quality time with your forex charts.

You Could Place a Maximum of Five Trades a Day

Day traders are not like scalpers in that they do not place countless numbers of trades on the foreign currency exchange in a single day. In fact, while there is no limit to how many trades a scalper can place in the forex market, a day trader usually never exceeds five trades in a single day.

 

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Profiting From Foreign Exchange Rates

foreign exchange rates

There is really only one reason why an individual would choose to start trading in a market as volatile as the foreign exchange and that is the need to make profits. Notably, the one thing that every individual in the world knows about foreign exchange rates is that they are extremely unpredictable and difficult to project.

This is both a good thing and a bad thing for individuals looking to make profits. The reason for this dual nature is that if foreign exchange rates fluctuate a lot then many opportunities to make money will show up. However, at the same time the fact that they fluctuate so much means that losing money becomes more of a threat.

This is the schizophrenic monster that most forex traders have to cope with on an everyday basis. In fact, whether a trader makes profits from fluctuating foreign exchange rate or not is primarily dependent on how they deal with this monster. Consider the following tips.

Always Try to Follow the Trend

Many traders think that they need to pick tops and bottoms of foreign exchange rates to profit when all they need to do is ride a trend to profit and repeat the same action as many times as they can without losing money.

Picking tops and bottoms is almost like predicting the future movement of forex rates which is extremely difficult. Therefore, all you need to do to make sure that you profit is follow the trend and never go against your signals.

Start with Small Position Sizes

You will be extremely jittery about your trades in the early stages of your forex trading career. Moreover, when following trends it can be difficult to be entirely sure whether a trend is true or false. This can make putting up a lot of money in the beginning very hard to stomach for most traders.

The best thing to do to cope with both these situations is to start with small position sizes and only add to them when the trend being followed by foreign exchange rates becomes obvious.

Never Forget to Use Stop Losses

Even with certain trends of foreign exchange rates, you can never be 100 percent sure of their invincibility because trends can change at a moment’s notice. This uncertainty is best countered with the help of stop loss special orders.

Stop loss orders are like your safety net. Their use would ensure that you only lose what you can tolerate losing and your losses do not get blown out of proportion because you were not around to time your exit. You should also look to use trailing stops to lock in profits.

Establish and Follow Your Rules Religiously

If you are a consistent individual then it is highly likely that you will slowly develop a process of trading. You must jot down this process into solid rules and restrictions designed to keep you objective and on the right path. This means weeding out impulses and emotional reactions because impulsive and emotional decisions about foreign exchange rates always tend to go wrong.

 

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Micro Accounts for Foreign Exchange Trading

Foreign exchange trading

Foreign exchange trading is not easy and if you want to achieve success in this volatile market, it is important that you choose a good trading account that suits your individual personality. The forex accounts available to traders include standard, micro and mini and you can make the choice as per your specific needs and requirements.

Micro trading accounts have become a popular choice of traders all over Australia as they have features that are similar to the standard account and enable traders to place smaller trades. If you are a beginner and do not understand the basic difference between trading accounts, let us illustrate it through an example. When you opt for a standard account, you may be able to place lots of 100,000 whereas in the mini account you can place lots of 10,000. With the micro account you can place lots of 1,000 units of your base currency.

Advantages of using a micro account for foreign exchange trading

The biggest advantage of opening a micro account for foreign exchange trading is that you need only small capital to open this account. It is an ideal choice for small traders who are trading on a budget. If you are a beginner, it is best to open this trading account as it provides you an opportunity to learn the fundamentals of this market without risking a lot of money.

Before you start trading in the forex market, you need to understand that there are inherent risks associated with this market. If you are not careful, you may lose big within a few trades. A micro account is one of the simplest ways to manage the risks of trading. As you will be placing smaller lots for trading, you may be able to minimise risks and maximise profits.

You will be able to practise different forex trading strategies, as the risk level is low. This can help you identify strategies that work best with different pairs of currencies. As the risk involved in trading with the micro account is less you may not lose big even if you have a losing trade. This helps protect your investments from big losses.

You can learn money management strategies like limit orders and placing stop loss orders on all your trades using the micro account. This can enable you to manage the risks associated with this market in an effective manner.

Tips for choosing micro accounts for foreign exchange trading

It is best to choose a micro account for foreign exchange trading from reputed brokers so that you may be able to get all the required features and functionalities in the account. You can choose brokers who are licensed and regulated by the Australian Securities and Investments Commission (ASIC) so that you get the best customer service and support from them.

When you choose a trading account that suits your trading style you may be able to execute a fast trade and take advantage of the trading opportunities available in the forex market. This can enable you to make consistent profits on your investments.

 

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Mini Accounts In Foreign Exchange Trading

foreign exchange trading

The forex market has come a long way from where it started from. It is now considered to be one of the most established yet free markets in the world, not to mention that it is extremely popular as well. Every individual interested in foreign exchange trading quickly finds out the various benefits of trading in this market.

However, one thing that is inescapable about forex trading is that nobody can succeed in it without experience. The catch with the forex market, however, is that by the time a trader gains the experience that he needs his account has already been blown because of the high stakes in the market.

Fortunately, there is now a way through which traders can prevent this from happening to them. This is the use of forex trading mini accounts.

What Are Mini Accounts?

Mini accounts are similar to standard accounts with the difference that their minimum lot size is much smaller than the minimum lot size of standard accounts. While the smallest lot size of a standard account is 100, 000 units, the smallest lot size of a mini account is 10, 000 units.

This means that a trader needs to spend less money in the mini account as each pip is worth one American dollar as opposed to 10 American dollars. Here are some benefits of foreign exchange trading with mini accounts.

They Make The Market More Accessible

First of all, the fact that a trader can trade in the forex market with less money because of mini accounts makes the entire profession of foreign exchange trading much more accessible to the masses.

Mini accounts, in other words, have taken an elitist investment market and turned it into a market where the common man can play on equal footing with the high flyers.

They Help Gain Experience

As described earlier, experience is vital when it comes to foreign exchange trading. Gaining experience can be extremely difficult for a forex trader without a mini account.

For instance, if there were no mini accounts then new traders would have to go straight from demo accounts to standard accounts, which is a huge leap because of the kind of sums of money involved.

They Help Build Trading Confidence

Mini accounts are also useful because they help new traders gain confidence in their foreign exchange trading abilities because they further their learning process. As traders use various forex techniques and methods, their confidence in their own abilities grows. This is important because forex trading is an extremely confidence based profession which means that success comes from being confident.

They Can Be Used For Strategy Development

Mini accounts are also useful for testing foreign exchange trading strategies on a smaller level before actually placing them in a full-fledged live account. The reason why these accounts are ideal for developing strategies is that with each pip only being worth one American dollar, a trader can focus more on the performance of his strategies as against worrying about his financial situation.

 

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Currency Trading vs. Other Online Options

currency trading

Since the new media entrenched itself into the daily lives of people, it has only grown in importance and significance. The popularity of the internet has now reached a point where a lot of individuals are choosing to find ways and means to earn their income.

There is an elaborate array of income options that an individual can take up on the internet and currency trading is one of them. If you are interested in giving up on convention, are looking to do something completely new, and have decided that an online method of earning your income is going to be it then you will soon have to make a crucial decision about which method you will use.

Here is a comparison of currency trading with other money making gambits available on the internet that should show you why the former is better than all other options online.

The Biggest Potential for Profits

Firstly, currency trading offers the biggest potential for profits. The forex market sees around four trillion American dollars every day in the form of transactions. All of these transactions are based on free market dynamics which means that any smart trader can get in on that action and make his fortune. The same cannot be said for other money making options on the internet.

Basic Financial Investment

In addition to this inherent potential, there is also the aspect that this profit potential is available to individuals with small investments as well. For instance, you can start currency trading with as low as 250 American dollars in your account. There are very few options on the internet that are accessible with such a low initial investment.

The reason why you can start with such a low investment is that you can use leverage in the forex market. Leverage will allow you to increase your buying power in the market. Leverage in currency trading can go as high as 400 to 1.

Simple Equipment and Support

Even in terms of equipment, currency trading is neither too expensive nor a difficult proposition. While some online money making options will require you to set up logistical things like deliveries, marketing, and promotions, in the forex market all you will need is a computer and a good internet connection.

No Selling or Marketing

Currency trading also wins over other means of making money on the internet because it does not require any selling or marketing. Selling or marketing is something that many individuals are not comfortable with because it makes them step out of their comfort zone.

No Inventory Considerations

In currency trading, a trader does not have to worry about stocks or inventories which not only takes away another element of stress but also takes away the need to create space for such things. Therefore, there is no need to spend money on acquiring and maintaining stocks as is the case with businesses that require physical products in the forex market.

Currency trading has many benefits over other methods of making money on the internet.

 

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Coping With Big Forex Wins and Losses

forex

If there is one thing that is true about the forex market, it is fair to every trader in equal measure. If a trader is balanced and moderate in the way he approaches his trading, then the FX market will reward him with wins and dish out losses on some occasions as well.

Unfortunately, these crunch situations are where most forex traders mess up. This is possibly why most new traders do not last in the FX market for anything more than a couple of years, with most bowing out ungracefully within a few months. What this shows is that it is extremely important for an FX trader to know how to cope with his wins and losses in the market.

Why This Is Important

When an inexperienced trader gets a series of wins or one big win he loses control of his entire process and ends up losing whatever money he had won or even more than what he had won. Similarly, a series of losses or one big loss causes the same kind of havoc on his trading process.

These common reactions are why every forex trader must learn to cope with big wins and big losses in the FX market. Here is a list of things that you should never do after a big win or big loss in the FX market.

Never Increase Your Position Size

The usual reaction to a lot of profits or many losses is for the trader to increase or decrease his position size. In the first case, he increases his position size because he becomes certain that he has cracked the market while, in the second case, the result could be an increase or decrease depending on retribution or fear, respectively.

However, this is exactly what you should never do in the forex market as consistency is the sole thing that will allow you to maintain your profits and curb the losses.

Always Resist Increasing the Number of Trades

Just like you should never change your position size after an abnormal amount of profits or losses, you should never change the number of trades either. For instance, winning a lot does not mean that you start placing more trades in the forex market nor does losing a lot mean that you should reduce the number of trades you place in the market.

Avoid Chopping and Changing

Many inexperienced traders go one step further when they incur a lot of losses or make a lot of profits. They change their strategy altogether because they either think that it is not working or that it is working because of their own personal brilliance. You should never change your strategy on the basis of a few losses or wins.

Review Both Carefully

At the end of the day, you need to understand both big losses and big wins. The reason for this is that big wins will teach you what you need to continue doing in the forex market while big losses will teach you what you should not do in the future.

 

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Dangers Posed By FX Rates In Trend Following

FX Trading

During your forex training, you will most probably be told that the best way you can profit from FX rates fluctuations is to use forex signals from trend following strategies. This is a theme that is common with almost all training programmes. It is also something that most mentors focus on with their protégés.

However, the big question is whether trend following strategies are really as good as everyone claims them to be when it comes to making profits from fluctuating FX rates. The answer is not clear cut because while these types of strategies can bring great profits, they also have their own inherent flaws.

Therefore, if you are about to adopt trend following strategies then you will have to always be mindful of their limitations so that you can proactively work towards countering them. For your benefit, here is a list of the most prominent flaws of trend following strategies.

The Market Will Only Trend Sometimes

The biggest problem with trend following strategies is that FX rates will not always show clear trends. In fact, it is a well-known fact that the forex market only trends 30 percent of the total time that it is open in a week.

This is a critical flaw of trend following strategies because it means that a trader has to show great restraint to not enter the market on less profitable or even harmful trades. You will have to make sure that you do not get swayed by your emotional reactions based on inactivity or financial targets not being met.

Your Rate Of Success Will Be Questionable

When you use trend following strategies, you will have to be very careful about which opportunities you avail because such strategies rely on quality of your trades as opposed to quantity.

For instance, such strategies often bring great net profits but end up creating more losing trades than winning ones. This means that you will have to ensure that the trades you place are based on certain projections of FX rates because trends can change without warning in the market.

You Will Be In Danger From Whipsaws And Reversals

The reason why the success rates of trend following strategies are questionable is that FX rates are extremely difficult to project without any doubt. Thus, as forex rates are extremely volatile, you can easily find your positions being rendered dangerous owing to sudden whipsaws and reversals of trends. For instance, if you project a certain direction of forex rates then there is no certainty that your projections will turn out to be right.

How To Use Trend Following Strategies To Ensure Success

Using trend following strategies to profit from volatile FX rates is like an art form. You have to make sure that you consider all possible situations when you place your trades in the forex market.

By considering all possible situations, you are essentially preparing for all contingencies because you will take steps for each profitable or dangerous situation in the forex market.

 

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Counter Trend Currency Trading

currency trading

There are different types of traders in the forex market. For instance, the majority of individuals new to currency trading tend to go for the easiest possible strategies. However, there are also some extremely confident individuals who have a need for perfection.

These kinds of individuals try to learn and implement multiple strategies in the beginning stages of their currency trading even though it is not really recommended. There can be two outcomes for such individuals.

The first is that they prove the established recommendation wrong and become the exception because their confidence was based on real talent. The second possible outcome is that they are unable to make it work. The difference between the two, as is obvious, is skill and diligence.

It is entirely possible for you to succeed in currency trading with multiple strategies provided you research them properly. Therefore, if you are considering using multiple strategies and one of your choices is a counter trend strategy then you should know that the latter is difficult to implement. The best way to implement it would be for you to learn about counter trend strategies.

What Are Counter Trend Strategies?

As their name suggests, counter trend strategies are all about trying to profit from the market by looking for trend reversals and downtrends. These types of strategies tend to require perfection and precision which is why some traders are attracted to them.

However, the reason why these types of currency trading strategies are considered to be difficult is that trend reversals are extremely unpredictable. Here are some pros and cons of such strategies.

Maximum Usage Of Reversals And Downtrends

The best part about counter trend currency trading strategies is that if you can get the right forex signal then you would be able to get the maximum profit possible from the trend reversal or whipsaw.

Moreover, it does not matter if you are trading the reversal of an uptrend or downtrend. With the right signal, you can pick the right tops and bottoms and come out flush with money.

High Reward To Risk Ratios Are Recommended

Another good thing about counter trend currency trading strategies is that they depend on the trader only going for those trades which have a good reward to risk ratio. This is a form of protection where, even if you lose a lot, a single win will have you cover all your losses and come out with net profits.

The Rate Of Failure Is Dangerously High

The reason why high reward to risk ratios are recommended is that the failure rate of such strategies is very high. In fact, the more you look for precision the worse your failure rate. This is why it is important for you to have a way through which you end up with net profits even if you lose 6 out of 10 trades and only win on four.

The high failure rate of counter trend currency trading strategies can be considered to be their worst flaw because it can not only affect a trader’s account equity but also his confidence levels.

 

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Contents Of Typical Forex Trading Systems

forex trading systems

When you complete your forex training course, you will realise that forex trading is a discipline where it is impossible to succeed without having structurally sound methods. What this essentially means is that you cannot succeed in forex trading without good forex trading systems on your side.

For instance, even if you are good at implementing individual techniques, you will need to combine them into coherent trading systems so that you end up with structures that are more than just the sum of their parts.

The Relevance of Good Forex Trading Systems

The primary purpose of creating systems out of individual techniques and methods is that it makes your entire effort to make money more synergistic in nature. If you were to use techniques on an individual basis then you would be unable to give an overall direction to your efforts.

In contrast, when you create a system you pick and choose techniques on the basis of various aspects such as compatibility with each other, suitability to your personality, and even relevance to your overall goal. There are a few things that should especially be in your systems whether you devise or acquire them.

Equity Percentage to Be Risked

You need to figure out how much money you can afford to lose in the market because this is one of the most important things that forex trading systems can help forex traders with.

If you specify the amount of money beyond which you cannot afford to take risk then your system would help you stay within that amount. In order to decide this amount, you will have to assess three things i.e. your account size, your expectations, and your personal risk tolerance levels.

Number of Lots to Be Traded

The maximum percentage that you can risk from your account will also define how many lots you can trade with your trading systems. Oftentimes, traders get carried away with the number of lots and find themselves in a soup when their margin levels start dropping alarmingly low.

By including the maximum number of lots you will allow yourself to trade in your forex trading systems, you are protecting yourself from margin calls.

Time Frames to Be Focused On

Your forex trading style and myriad other facets will determine which time frames you base your analysis on. You can choose from anything between a minute to a few days.
Most strategies employ around two to three time frames so as to gain a more comprehensive view of the market. It is better to specify which time frames you will be using in your forex trading systems for greater clarity in times of need.

Trigger Points for Entries and Exits

There will be some trigger points on the basis of which you open and close your trades in the market. These trigger points should be well defined and predetermined in your forex trading systems. If they are not then your forex trading would become discretionary in nature and will lead to losses.

 

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