Forex Minis Shrink Risk Exposure by Selwyn Gishen
Trading currencies means buying one country's currency while simultaneously selling another country's currency. Every currency trade therefore involves two currencies. The usual size of a currency pair is 100,000 units, known as a "standard lot".
In most cases, beginner traders do not want to stomach the risk that comes with the exposure of a standard lot. As a result, most online forex brokers offer the ability to trade mini lots, which are 10,000 units of the currency rather than 100,000. For a new trader, these mini lots can be an especially effective tool for learning to trade forex. (For background reading, see Getting Started In Forex.)What is a pip?Before one can fully understand the benefits of a mini lot, it is important to review the concept of a pip. A pip is the smallest increment that a currency pair can move. For most currency pairs, a pip is a change in the fourth decimal place of the currency quote. For example, if EUR/USD is quoted at 1.5567 and it moves to 1.5568, it has increased by 1 pip. The value of 1 pip is calculated by the size of the lot that is traded. So, if you buy a standard lot of 100,000 EUR/USD at 1.5567 and it goes to 1.5568, a 1-pip move, then the value of your trade has increased by $10 (or 100,000 x 0.0001). (For more on this, see What is the value of one pip and why are they different between currency pairs?)If we did the exact same calculation using a mini lot, then we would multiply the 1 pip by the size of a 10,000 mini lot instead of the usual 100,000 lot. So 10,000 x 0.0001 = $1. When you trade a standard lot, the value of the pip is $10 but when trading a mini lot the value of a pip is $1. This is true when the U.S. dollar is the second, or quoted, currency in the pair. (For more, see Common Questions About Currency Trading.)Base Currency Vs. Quote CurrencyOne other piece of information to remember is that a currency pair is comprised of a base currency, which is the first currency listed in the pair, and the quote currency, which is the second currency listed in the pair. In the case of the EUR/USD, the euro is the base currency and the dollar is the quote currency
The profit or loss is always expressed in terms of the quote currency. If the currency pair is the GBP/USD, then the base currency is the British pound and the quote currency is the U.S. dollar. For the USD/CAD, the base currency is the U.S. dollar and the quote currency is the Canadian dollar. Why the dollar is listed first in some instances but second in others is just a matter of convention. (For more insight, see the Forex Tutorial: Reading a Quote and Understanding The Jargon.)The Value of a PipThe last important point that should be noted before we talk about mini lots specifically is the value of a pip. Suppose you are trading the GBP/JPY; the British pound is the base currency and the Japanese yen is the quote currency. Now in this instance, we have an exception to the fourth decimal place rule for the size of a pip. In the case of the yen, 1 pip is measured in the second decimal place. The yen is the only exception. To calculate the value of the move, if we buy dollars against the yen and the dollar goes up from 103.45 to 103.46, then we have a 1-pip move. Multiplying by the standard lot of 100,000 x 0.01 = 1,000 yen. To bring this back to dollars, you would then divide the 1,000 yen by the dollar rate, let's say it's 103.46, which equals $9.66.Why Trade Minis?The real value of trading minis is in the versatility it provides in matching the trade size to an acceptable level of risk. For example, suppose you decide to take a long position in the USD/JPY. Let's assume that your entry point is 103.55 and that you've set your stop-loss order 15 pips away at 103.40. If you have $1,000 in your trading account, the maximum risk you should take in any trade is 3% of your trading capital. Because your capital is $1,000, 3% of your capital is $30. If you are stopped out of this trade and you are trading a mini lot, you will lose $15. But if you are prepared to risk $30, you can actually trade two mini lots and get the power and benefit of some leverage. If you were only trading standard lots, this trade would not be possible because a 15-pip loss, as per this example, would be $150, which is 15% of your $1,000 trading capital. Given a risk tolerance of 3% of the portfolio, this is too much risk for one trade. (For related reading, see Forex Leverage: A Double-Edged Sword.)Mini lots allow a trader to adjust the amount of effective leverage used in each trade. With mini contracts, you can trade the equivalent of one standard lot by simply trading 10 minis. If you only want to trade a half of a standard lot, you can do so by buying five mini lots. ConclusionMini lots provide flexibility that standard lots cannot offer. A mini lot is simply 10% of a standard lot and therefore, by trading in minis you can trade in fractions of a standard lot, anywhere from 1 mini to 10 minis. Mini lots are useful if the natural stop loss for your trade is farther away than the maximum risk you feel comfortable taking. You can simply reduce the risk by decreasing the number of minis until that number would equate to the stop-loss risk. Of course, if your market maker offers you 100:1 leverage, then for an account of $1,000, you can trade up to 10 minis at a time. The number of minis traded should be governed by how much you can lose if your trade goes wrong, which should not exceed 2-3% per trade.
by Selwyn Gishen, (Contact Author Biography)Selwyn Gishen is a trader with more than 15 years of experience trading forex and equities for a private equity fund. For the past 35 years, he has also been a student of metaphysics, and has written a book called "Mind: How Changing Your Mind Can Change Your Life!" (2007). Gishen is the founder of FXNewsandViews.Com and the author of a forex trading guide entitled "Trading the Forex Markets: A Foundation Course for Online Traders". The course is designed to provide the trader with all the aspects of Gishen's Fusion Trading Model.
Saturday, August 2, 2008
Combining Forex Spot And Futures Transactions
Combining Forex Spot And Futures Transactions by Noble DraKoln
In 1972, for the first time ever, everyday investors were allowed to trade the difference in currency values in the United States. Much of the world had just stopped pegging their currencies against the dollar and the oil industry was fueling a worldwide explosion in importing and exporting activity. To tap into this, currency trading was introduced in the form of futures contracts. At the time, the Chicago Mercantile Exchange (CME) was strictly involved with agricultural products, but it saw the potential economic success of servicing the then nascent currency exchange market and decided to give it a chance.
document.write('');
By 2008, currency trading exceeded $3 trillion dollars daily, but the majority of traders only participate in a fraction of the currency opportunities available to them. However, the currency market is a multilayered kaleidoscope of spot, futures and options trading. The currency market also has very distinct trending patterns that can become more difficult to interpret the shorter the time frame to trade. This is the problem that many new currency traders face as they enter the world of spot trading, but it can be overcome by combining spot, futures and options currency trades. Read on to learn how this works. Spot Trading ChallengesWith the introduction of the Commodity Futures Modernization Act of 2000, spot currency trading (forex) became the rage. Traders that were new to currency trading could enter the spot market with as little as $300, giving them leverage of almost 500:1. While the leverage is inexpensive, small fluctuations can represent larger losses, as well as large profits, in a short period of time. Another major drawback to spot currency trading is the potential interest rate charges of holding on to a spot contract past the requisite 24-hour time period. Combine these issues with the slippage that occurs as a result of sporadic trading activity, and the challenges quickly become apparent as to why traders may find trading in the forex spot market difficult. (For more, see Getting Started In Forex.)There is a better way. When currency trading was first introduced in the futures market, it was created to act as protection - a hedge for multinational corporations and banks that needed to protect themselves from the downside risk of buying free floating currencies. They would take delivery of a particular currency, such as the Canadian dollar, and then short it in the futures market or buy a put in the options market just in case the currency dropped in value. This protection would allow them to hold on to their Canadian dollar trade longer in the face of short-term fluctuations that were simply minor retracements in an overall longer term trend. In the past 30 years, nothing has changed. The currency spot market can still be protected by the futures currency market, and the option currency market can protect both the spot and the futures currency market. (For related reading, see Practical And Affordable Hedging Strategies.)The interrelationship between the currency spot and options and futures currency markets is rarely exploited by retail traders. Retail traders are typically fixated on fast profits with little regard to the downside risk beyond placing a stop order. This approach is just one-third of the currency universe. With the proper combination of the spot market and the futures market, or the spot market and the options market, a currency trader can optimize performance by taking advantage of both the short-term fluctuations while catching the long-term moves that would be missed by trading the spot market alone.
Downside Risk of Spot Forex Transactions In Figure 1, we can see the euro trending upward from $1.44 to $1.60. This entire move of 16 cents (1 cent = $1,000 when using a standard contract of 100,000 units) represents a potential gain of $16,000 in the spot market. From February of 2008 to April 2008, there were multiple pullbacks and retracements. On March 17, 2008, the market dropped in value from $1.56 to $1.53. This represents a $3,000 loss. The market eventually rebounds, but hindsight is 20/20 - while you are in the trade, there is no such consolation. A $3,000-dollar drop could wipe out the margin of a full-sized spot forex contract. So, while you could be right about the market's overall direction, you can be wrong on your timing in executing the trade. (For related reading, see Trading Is Timing.)
Figure1
Source: TradeNavigator.comWhile a trader with a strong money management program would not hold on to a loss of this magnitude all the way down, the fact that the trader must perfectly time the top and bottom of the market's activity in order to succeed makes profiting a herculean task. Fortunately, there is a simple way to protect your account in the face of these factors. In Figure 1, it can clearly be seen that the market is trending up. In order to take maximum advantage of this momentum, there is no doubt that the smart money would go long the euro, as shown in Figure 2. To avoid a sudden pullback in price, the easiest position protection is to either short the euro in the futures market or purchase a euro put option. (For more on this strategy, see Prices Plunging? Buy A Put!)
Figure 2
Source: TradeNavigator.comUsing Futures Contracts to Manage Spot RisksIf a euro futures contract is used, two new variables are added to the equation: the margin to use on the contract and the possibility that the market will move against your spot transaction. The margin in the euro futures market comes in either a full-sized contract or a mini futures contract. As of June 2008, a full-sized euro contract required a margin of $3,105 and every one-cent move would be equal to $1,250. A mini euro contract required a margin of $1,553, about half as costly, and a one-cent move equaled $625. (To learn more, see Forex Minis Shrink Risk Exposure.)Depending on the amount of capital available to you, a full-sized futures contract makes the most sense as a source of protection from downside risk. On the other hand, you are losing an additional $250 for each one-cent move if you decide to use a futures contract to protect yourself and the market moves against you. You could also attempt to use a mini-euro contract, but the opposite problem would occur. Every one-cent move is worth $625 in the mini, but every one-cent move in the spot is $1,000. This leaves the position underprotected by $375 and defeats the purpose of the protective position altogether.
document.write('');
Using Options to Manage Spot Risks Another route that a trader can take is to use a CME euro put option. Based on an option's volatility, where its price is in relation to the underlying asset, and the time until expiration, the value of the put option will fluctuate. In this instance, we can choose to purchase a put option at the same price as when we decide to go long the spot euro contract. This would be considered an at-the-money option purchase. The option can range in value, but a general rule is that the option price will typically fall between 10-20% of the value of the futures margin. This could range anywhere from $300 to $600 in this instance. This small upfront cost is worth spending if it will help protect you from a $3,000 loss.Because an option's loss is limited to the amount invested, the spot trader's risk exposure never exceeds the premium's value. This means that the underlying spot position can increase in value without the worry that you will lose $250 for every one-cent move against you, like you would if you had a futures contract protecting you. (For more, see Getting Started In Forex Options.)
Figure 3
Source: TradeNavigator.comIn Figure 3, the euro successfully rebounds from its low and eventually exceeds the original entry price of the spot euro contract. Without the option contract as protection, there would have been a potential loss of $3,000 for a spot position, with little to no recourse. The only hope for the spot trader losing money would have been to use a stop loss-order and hope to catch the rebound in time to make up for the loss. Conclusion The spot, futures and option currency markets were designed to be traded together, creating a daisy chain of protection with one another. Retail traders that limit their trading to just the spot market rob themselves of one of the most important risk-management tools available to them. Trading in this combination format of spot and futures or spot and options is not perfect. Typically, for the smaller retail trader, combining currency spot and futures contracts can actually have the undesired effect of being too expensive while opening the trader up to unexpected additional price risks. Combining spot forex trading with options contracts has exactly the opposite effect, creating maximum protection and minor expense. No matter which tool is used to protect the spot position, the potential for loss still exists. It's simply a matter of shifting the loss from the primary position to a secondary position. By trading in this way, spot forex traders can develop a longer term outlook when they initiate a position. They will be able to trade without the fear of being right about the market, but not being able to afford to stick around because the leverage is so great. Plus, they will add another dimension to their trading: hedging, which was once thought to only be the domain of multinational banks.
by Noble DraKoln,
(Contact Author Biography)Noble DraKoln is founder and President of Liverpool Trading Company, and Speculator Academy. He is a licensed futures professional. He has been a guest speaker at various futures and forex trading conferences around the world including Los Angeles, Las Vegas, Chicago, New York, Paris, Frankfurt and Madrid, and is a former editor of Futures Magazine. His new book "Winning the Trading Game" is set to be released in March 2008 and is currently available on Amazon.com.
In 1972, for the first time ever, everyday investors were allowed to trade the difference in currency values in the United States. Much of the world had just stopped pegging their currencies against the dollar and the oil industry was fueling a worldwide explosion in importing and exporting activity. To tap into this, currency trading was introduced in the form of futures contracts. At the time, the Chicago Mercantile Exchange (CME) was strictly involved with agricultural products, but it saw the potential economic success of servicing the then nascent currency exchange market and decided to give it a chance.
document.write('');
By 2008, currency trading exceeded $3 trillion dollars daily, but the majority of traders only participate in a fraction of the currency opportunities available to them. However, the currency market is a multilayered kaleidoscope of spot, futures and options trading. The currency market also has very distinct trending patterns that can become more difficult to interpret the shorter the time frame to trade. This is the problem that many new currency traders face as they enter the world of spot trading, but it can be overcome by combining spot, futures and options currency trades. Read on to learn how this works. Spot Trading ChallengesWith the introduction of the Commodity Futures Modernization Act of 2000, spot currency trading (forex) became the rage. Traders that were new to currency trading could enter the spot market with as little as $300, giving them leverage of almost 500:1. While the leverage is inexpensive, small fluctuations can represent larger losses, as well as large profits, in a short period of time. Another major drawback to spot currency trading is the potential interest rate charges of holding on to a spot contract past the requisite 24-hour time period. Combine these issues with the slippage that occurs as a result of sporadic trading activity, and the challenges quickly become apparent as to why traders may find trading in the forex spot market difficult. (For more, see Getting Started In Forex.)There is a better way. When currency trading was first introduced in the futures market, it was created to act as protection - a hedge for multinational corporations and banks that needed to protect themselves from the downside risk of buying free floating currencies. They would take delivery of a particular currency, such as the Canadian dollar, and then short it in the futures market or buy a put in the options market just in case the currency dropped in value. This protection would allow them to hold on to their Canadian dollar trade longer in the face of short-term fluctuations that were simply minor retracements in an overall longer term trend. In the past 30 years, nothing has changed. The currency spot market can still be protected by the futures currency market, and the option currency market can protect both the spot and the futures currency market. (For related reading, see Practical And Affordable Hedging Strategies.)The interrelationship between the currency spot and options and futures currency markets is rarely exploited by retail traders. Retail traders are typically fixated on fast profits with little regard to the downside risk beyond placing a stop order. This approach is just one-third of the currency universe. With the proper combination of the spot market and the futures market, or the spot market and the options market, a currency trader can optimize performance by taking advantage of both the short-term fluctuations while catching the long-term moves that would be missed by trading the spot market alone.
Downside Risk of Spot Forex Transactions In Figure 1, we can see the euro trending upward from $1.44 to $1.60. This entire move of 16 cents (1 cent = $1,000 when using a standard contract of 100,000 units) represents a potential gain of $16,000 in the spot market. From February of 2008 to April 2008, there were multiple pullbacks and retracements. On March 17, 2008, the market dropped in value from $1.56 to $1.53. This represents a $3,000 loss. The market eventually rebounds, but hindsight is 20/20 - while you are in the trade, there is no such consolation. A $3,000-dollar drop could wipe out the margin of a full-sized spot forex contract. So, while you could be right about the market's overall direction, you can be wrong on your timing in executing the trade. (For related reading, see Trading Is Timing.)
Figure1
Source: TradeNavigator.comWhile a trader with a strong money management program would not hold on to a loss of this magnitude all the way down, the fact that the trader must perfectly time the top and bottom of the market's activity in order to succeed makes profiting a herculean task. Fortunately, there is a simple way to protect your account in the face of these factors. In Figure 1, it can clearly be seen that the market is trending up. In order to take maximum advantage of this momentum, there is no doubt that the smart money would go long the euro, as shown in Figure 2. To avoid a sudden pullback in price, the easiest position protection is to either short the euro in the futures market or purchase a euro put option. (For more on this strategy, see Prices Plunging? Buy A Put!)
Figure 2
Source: TradeNavigator.comUsing Futures Contracts to Manage Spot RisksIf a euro futures contract is used, two new variables are added to the equation: the margin to use on the contract and the possibility that the market will move against your spot transaction. The margin in the euro futures market comes in either a full-sized contract or a mini futures contract. As of June 2008, a full-sized euro contract required a margin of $3,105 and every one-cent move would be equal to $1,250. A mini euro contract required a margin of $1,553, about half as costly, and a one-cent move equaled $625. (To learn more, see Forex Minis Shrink Risk Exposure.)Depending on the amount of capital available to you, a full-sized futures contract makes the most sense as a source of protection from downside risk. On the other hand, you are losing an additional $250 for each one-cent move if you decide to use a futures contract to protect yourself and the market moves against you. You could also attempt to use a mini-euro contract, but the opposite problem would occur. Every one-cent move is worth $625 in the mini, but every one-cent move in the spot is $1,000. This leaves the position underprotected by $375 and defeats the purpose of the protective position altogether.
document.write('');
Using Options to Manage Spot Risks Another route that a trader can take is to use a CME euro put option. Based on an option's volatility, where its price is in relation to the underlying asset, and the time until expiration, the value of the put option will fluctuate. In this instance, we can choose to purchase a put option at the same price as when we decide to go long the spot euro contract. This would be considered an at-the-money option purchase. The option can range in value, but a general rule is that the option price will typically fall between 10-20% of the value of the futures margin. This could range anywhere from $300 to $600 in this instance. This small upfront cost is worth spending if it will help protect you from a $3,000 loss.Because an option's loss is limited to the amount invested, the spot trader's risk exposure never exceeds the premium's value. This means that the underlying spot position can increase in value without the worry that you will lose $250 for every one-cent move against you, like you would if you had a futures contract protecting you. (For more, see Getting Started In Forex Options.)
Figure 3
Source: TradeNavigator.comIn Figure 3, the euro successfully rebounds from its low and eventually exceeds the original entry price of the spot euro contract. Without the option contract as protection, there would have been a potential loss of $3,000 for a spot position, with little to no recourse. The only hope for the spot trader losing money would have been to use a stop loss-order and hope to catch the rebound in time to make up for the loss. Conclusion The spot, futures and option currency markets were designed to be traded together, creating a daisy chain of protection with one another. Retail traders that limit their trading to just the spot market rob themselves of one of the most important risk-management tools available to them. Trading in this combination format of spot and futures or spot and options is not perfect. Typically, for the smaller retail trader, combining currency spot and futures contracts can actually have the undesired effect of being too expensive while opening the trader up to unexpected additional price risks. Combining spot forex trading with options contracts has exactly the opposite effect, creating maximum protection and minor expense. No matter which tool is used to protect the spot position, the potential for loss still exists. It's simply a matter of shifting the loss from the primary position to a secondary position. By trading in this way, spot forex traders can develop a longer term outlook when they initiate a position. They will be able to trade without the fear of being right about the market, but not being able to afford to stick around because the leverage is so great. Plus, they will add another dimension to their trading: hedging, which was once thought to only be the domain of multinational banks.
by Noble DraKoln,
(Contact Author Biography)Noble DraKoln is founder and President of Liverpool Trading Company, and Speculator Academy. He is a licensed futures professional. He has been a guest speaker at various futures and forex trading conferences around the world including Los Angeles, Las Vegas, Chicago, New York, Paris, Frankfurt and Madrid, and is a former editor of Futures Magazine. His new book "Winning the Trading Game" is set to be released in March 2008 and is currently available on Amazon.com.
Adding Leverage To Your Forex Trading
Adding Leverage To Your Forex Trading by Selwyn Gishen
In the foreign exchange markets, it is common to find leverage of 100:1 or even more. However, just because the market maker or broker may offer you leverage as high as 100:1, it doesn't mean you have to use all the leverage available. In fact, if you are a savvy trader, you will only use high leverage when you can calculate and manage the risks associated with the high leverage to your advantage. We'll show you how this is profitable without being problematic.
Margin and Leverage BasicsUsing money borrowed from a broker/dealer to purchase securities or foreign exchange is known as "buying on margin". A trader will usually place a certain amount of money in his or her brokerage account and the broker will use that money as a deposit to allow the trader to buy securities or foreign exchange contracts valued at a multiple compared to the deposited amount.Leverage is the use of other people's money to buy or sell contracts or securities. If a broker offers a 20:1 leverage, it means he is willing to allow the trader to borrow 20-times the amount of money in the account to make a trade. So, if a contract is worth $10,000 and the broker is offering 20:1 leverage, a trader will only need to have $500 in his or her account to purchase the contract worth $10,000. If the value of the contract goes to $11,000, the trader will make a profit of a $1,000. This would represent a return of 10% on the contract purchase price, but a return of 200% on equity. (For background reading, see Forex Leverage: A Double Edged Sword and Leverage's "Double-Edged Sword" Need Not Cut Deep.) The extreme amounts of leverage that are common in the forex markets occur because the forex is the largest and most liquid market in the world, making it very easy to get into and out of a position. This allows a trader to control, with a certain certainty, how much he or she is willing to lose on a trade. Because it is possible to exit a position quickly and efficiently, forex brokers allow their clients to benefit from high leverage. Forex Vs. Stocks and Futures MarketsLeverage in the forex markets is much higher than in most other markets. For example, if you trade equities, you will be able to borrow twice the amount of money you have in your account. In the case of futures, you may be able to borrow 20-times the amount of funds you have in your account. In the forex markets, because the leverage is so high, the broker or market maker will require you to sign an agreement specifying how a losing position will be dealt with. Because a highly leveraged account poses a greater risk for both the market maker and the trader, there is usually a mechanism in the agreement that will allow the market maker to automatically liquidate a trader's position if it loses 75% of the margin or deposit. To safeguard the broker/market maker and to ensure that the trader does not have to add extra funds to the account, the losing position will be automatically closed at a certain point in time if the losses on that position threaten to be more than the amount of money available in the trading account. Traders should read the agreements they have with their market makers very carefully in order to understand how a losing leveraged position will be addressed.Should a Trader Use All the Margin Available?Generally, a trader should not use all of his or her available margin. A trader should only use leverage when the advantage is clearly on his or her side. For, example, a trader should plan a trade and know exactly where to exit the trade if the market moves in the desired direction. Once the amount of risk in terms of the number of pips is known, it is possible to determine how much money will be lost if the trader's stop-loss is hit. As a general rule, this loss should never be more than 3% of trading capital. If a position is leveraged too much, so that the potential loss could be, say, 30% of trading capital, then the leverage should be reduced until the potential loss is no greater than 3%. Each trader will have his or her own risk parameters and may want to deviate either more or less than the general guideline of 3%. (For more insight, read Limiting Losses.)
Another thing for the trader to note is that the larger the amount of money one has for trading, the easier is it to use leverage safely. Because a leveraged position can lose money just as quickly as it can make money, a trader should have enough funds to act as a cushion against any drawdown or adverse moves without the risk of being automatically liquidated and losing the bulk of his or her trading capital.The specific risk of leverage is the fact that traders use borrowed money to buy or sell a contract. Unless the market is making a favorable move, losses will be magnified by the amount of leverage employed. How Should a Trader Calculate How Much Margin to Use?Suppose that you have $10,000 in your trading account and you decide to trade 10 mini USD/JPY lots. Each move of one pip in a mini account is worth approximately $1, but when trading 10 minis, each pip move is worth approximately $10. If you are trading 100 minis, then each pip move is worth about $100. Thus, a stop-loss of 30 pips could represent a potential loss of $30 for a single mini lot, $300 for 10 mini lots and $3,000 for 100 mini lots. Therefore, with a $10,000 account and a 3% maximum risk per trade, you should leverage only up to 30 mini lots, even though you may have the ability to buy or sell more than that. (For more, see Forex Minis Shrink Risk Exposure and Finding Your Margin Investment Sweet Spot.)ConclusionTrading in the forex markets offers many potentially profitable opportunities. Using leverage can magnify these opportunities to a very large degree. Using leverage requires a complete understanding of risk management and the use of properly defined stop-loss orders in the market. It also requires that traders be disciplined enough to follow the rules necessary for taking advantage of leveraged markets. Leveraged positions can be a trader's best friend or his or her worst enemy - it all depends on mindset and trading habits. Good traders are disciplined and adhere to their risk management rules.
by Selwyn Gishen, (Contact Author Biography)Selwyn Gishen is a trader with more than 15 years of experience trading forex and equities for a private equity fund. For the past 35 years, he has also been a student of metaphysics, and has written a book called "Mind: How Changing Your Mind Can Change Your Life!" (2007). Gishen is the founder of FXNewsandViews.Com and the author of a forex trading guide entitled "Trading the Forex Markets: A Foundation Course for Online Traders". The course is designed to provide the trader with all the aspects of Gishen's Fusion Trading Model.
In the foreign exchange markets, it is common to find leverage of 100:1 or even more. However, just because the market maker or broker may offer you leverage as high as 100:1, it doesn't mean you have to use all the leverage available. In fact, if you are a savvy trader, you will only use high leverage when you can calculate and manage the risks associated with the high leverage to your advantage. We'll show you how this is profitable without being problematic.
Margin and Leverage BasicsUsing money borrowed from a broker/dealer to purchase securities or foreign exchange is known as "buying on margin". A trader will usually place a certain amount of money in his or her brokerage account and the broker will use that money as a deposit to allow the trader to buy securities or foreign exchange contracts valued at a multiple compared to the deposited amount.Leverage is the use of other people's money to buy or sell contracts or securities. If a broker offers a 20:1 leverage, it means he is willing to allow the trader to borrow 20-times the amount of money in the account to make a trade. So, if a contract is worth $10,000 and the broker is offering 20:1 leverage, a trader will only need to have $500 in his or her account to purchase the contract worth $10,000. If the value of the contract goes to $11,000, the trader will make a profit of a $1,000. This would represent a return of 10% on the contract purchase price, but a return of 200% on equity. (For background reading, see Forex Leverage: A Double Edged Sword and Leverage's "Double-Edged Sword" Need Not Cut Deep.) The extreme amounts of leverage that are common in the forex markets occur because the forex is the largest and most liquid market in the world, making it very easy to get into and out of a position. This allows a trader to control, with a certain certainty, how much he or she is willing to lose on a trade. Because it is possible to exit a position quickly and efficiently, forex brokers allow their clients to benefit from high leverage. Forex Vs. Stocks and Futures MarketsLeverage in the forex markets is much higher than in most other markets. For example, if you trade equities, you will be able to borrow twice the amount of money you have in your account. In the case of futures, you may be able to borrow 20-times the amount of funds you have in your account. In the forex markets, because the leverage is so high, the broker or market maker will require you to sign an agreement specifying how a losing position will be dealt with. Because a highly leveraged account poses a greater risk for both the market maker and the trader, there is usually a mechanism in the agreement that will allow the market maker to automatically liquidate a trader's position if it loses 75% of the margin or deposit. To safeguard the broker/market maker and to ensure that the trader does not have to add extra funds to the account, the losing position will be automatically closed at a certain point in time if the losses on that position threaten to be more than the amount of money available in the trading account. Traders should read the agreements they have with their market makers very carefully in order to understand how a losing leveraged position will be addressed.Should a Trader Use All the Margin Available?Generally, a trader should not use all of his or her available margin. A trader should only use leverage when the advantage is clearly on his or her side. For, example, a trader should plan a trade and know exactly where to exit the trade if the market moves in the desired direction. Once the amount of risk in terms of the number of pips is known, it is possible to determine how much money will be lost if the trader's stop-loss is hit. As a general rule, this loss should never be more than 3% of trading capital. If a position is leveraged too much, so that the potential loss could be, say, 30% of trading capital, then the leverage should be reduced until the potential loss is no greater than 3%. Each trader will have his or her own risk parameters and may want to deviate either more or less than the general guideline of 3%. (For more insight, read Limiting Losses.)
Another thing for the trader to note is that the larger the amount of money one has for trading, the easier is it to use leverage safely. Because a leveraged position can lose money just as quickly as it can make money, a trader should have enough funds to act as a cushion against any drawdown or adverse moves without the risk of being automatically liquidated and losing the bulk of his or her trading capital.The specific risk of leverage is the fact that traders use borrowed money to buy or sell a contract. Unless the market is making a favorable move, losses will be magnified by the amount of leverage employed. How Should a Trader Calculate How Much Margin to Use?Suppose that you have $10,000 in your trading account and you decide to trade 10 mini USD/JPY lots. Each move of one pip in a mini account is worth approximately $1, but when trading 10 minis, each pip move is worth approximately $10. If you are trading 100 minis, then each pip move is worth about $100. Thus, a stop-loss of 30 pips could represent a potential loss of $30 for a single mini lot, $300 for 10 mini lots and $3,000 for 100 mini lots. Therefore, with a $10,000 account and a 3% maximum risk per trade, you should leverage only up to 30 mini lots, even though you may have the ability to buy or sell more than that. (For more, see Forex Minis Shrink Risk Exposure and Finding Your Margin Investment Sweet Spot.)ConclusionTrading in the forex markets offers many potentially profitable opportunities. Using leverage can magnify these opportunities to a very large degree. Using leverage requires a complete understanding of risk management and the use of properly defined stop-loss orders in the market. It also requires that traders be disciplined enough to follow the rules necessary for taking advantage of leveraged markets. Leveraged positions can be a trader's best friend or his or her worst enemy - it all depends on mindset and trading habits. Good traders are disciplined and adhere to their risk management rules.
by Selwyn Gishen, (Contact Author Biography)Selwyn Gishen is a trader with more than 15 years of experience trading forex and equities for a private equity fund. For the past 35 years, he has also been a student of metaphysics, and has written a book called "Mind: How Changing Your Mind Can Change Your Life!" (2007). Gishen is the founder of FXNewsandViews.Com and the author of a forex trading guide entitled "Trading the Forex Markets: A Foundation Course for Online Traders". The course is designed to provide the trader with all the aspects of Gishen's Fusion Trading Model.
Invest in Forex
Invest in Forex
The investment environment is as harsh and unforgiving as is the arctic landscape.
Awesome splendour conceals threat and ruin.
Only a select few with the proper mix of character, values, vision, expertise and resourcefulness succeed in such an environment.
Dear Investor,
At DayForex Capital Management we take our lead from the great explorers such as Sir Ernest Shackleton who kept a cool head, calculated the odds and took the necessary risks that led his men to safety with his philosophy, "Don't be afraid to change your plans. Don't be afraid to do nothing when that's the best thing to do. Prepare, prepare, prepare; plan, plan, plan."
We understand just how large and forbidding this market can be, dwarfing individuals and their systems. We have respect for the market and know that in the end humility , not arrogance, leads to success. Like Shackleton we believe that if one is going to be bold, this boldness must rest on detailed and careful preparation.
Join us on an epic voyage to investment success.
The reward is indisputable. We know, we have been there.
Register here to receive much more information
Sincerely,Dirk D. du ToitCEO, DayForex"What it takes to reach the destination"
The investment environment is as harsh and unforgiving as is the arctic landscape.
Awesome splendour conceals threat and ruin.
Only a select few with the proper mix of character, values, vision, expertise and resourcefulness succeed in such an environment.
Dear Investor,
At DayForex Capital Management we take our lead from the great explorers such as Sir Ernest Shackleton who kept a cool head, calculated the odds and took the necessary risks that led his men to safety with his philosophy, "Don't be afraid to change your plans. Don't be afraid to do nothing when that's the best thing to do. Prepare, prepare, prepare; plan, plan, plan."
We understand just how large and forbidding this market can be, dwarfing individuals and their systems. We have respect for the market and know that in the end humility , not arrogance, leads to success. Like Shackleton we believe that if one is going to be bold, this boldness must rest on detailed and careful preparation.
Join us on an epic voyage to investment success.
The reward is indisputable. We know, we have been there.
Register here to receive much more information
Sincerely,Dirk D. du ToitCEO, DayForex"What it takes to reach the destination"
How to get started with NZForex Foreign Exchange
Get Started
Select the appropriate link below for information about how NZForex can help you with your specific foreign exchange needs.
Foreign exchange for business General Exporters Importers
Foreign exchange for individuals General Overseas Purchase Living Overseas/Expatriates Migration Investments/Pensions
How do I transfer funds with NZForex?Dealing with us is simple. You register on the website and then log in. When logged in you can get quotes, add beneficiary details and book deals/funds transfers. After you register, an NZForex representative will call you to discuss your transfer(s) and make sure the system is set up correctly for your needs. You will also be able to ask any questions you may have about the service and process at this time. You can lock in rates prior to us having your funds for currencies if we can receive funds overnight or you leave a small deposit. If it will take longer for funds to reach us, it is better to send the funds to us prior to booking the exchange rate. Once we have the funds, you will be advised and can then lock in the exchange rate. Please note we do not support transfers in Indian Rupees, Indonesian Rupiah, Phillipine Peso, Thai Baht, Pakastini Rupee, Iraqi Dinar (and a number of other currencies) at this stage.
Benefits of using NZForex
No bank queuesOne of the great things about our service is that you can complete an international transfer without leaving your office or home. We give you a variety of ways to get your funds to us so we can send the international transfer as quickly as possible.
Unbeatable rates & low fees ? Yes please!Not only do we take the hassle out of your international transfers but we do it with low (or often no!) fees. We charge a maximum fee of NZ$ 15 for payments, and will waive the fee altogether on transactions that exceed NZ$ 10,000 per beneficiary. Click here for more details on fees.
Exchange rates - a simple guarantee. We will not be beaten!There is no need to shop around, our rates will be good straight up.
Security of your moneyThe safety of your money is an important consideration when deciding which provider you use to send money internationally.NZForex is a brand of OzForex Pty Ltd, a leading Australian foreign exchange provider. When dealing through NZForex you are transacting with OzForex. OzForex holds an Australian Financial Services Licence (AFSL) issued by ASIC to deal in foreign exchange. This licence can be viewed by following this link to the ASIC website: (AFS Licence number 226 484)OzForex offers a safe and regulated alternative to the banks for transferring funds. Our business effectively transits money from customer to beneficiary via leading financial institutions. We do not pay out client transfers until clients have paid OzForex which means we have no settlement risk on transfers. As we do not carry any overnight market risk, unlike some other providers, we do not suffer losses resulting from exchange rate movements and so you can feel comfortable that your transfer will reach the recipient on time, every time. Your funds are held in accounts with major financial institutions and are only released once your outward payment has been sent. OzForex is a trusted provider to thousands of customers world-wide who have enjoyed the benefits of excellent rates and low fees without compromising on service.Foreign exchange dealing is regulated in Australia by the Australian Securities and Investment Commission and companies providing services to deal in foreign exchange should be able to show they hold an Australian Financial Serviced Licence. You should not deal with a foreign exchange provider that cannot demonstrate in writing that they are regulated.Recent changes to the regulatory environment have seen foreign exchange regulation brought under the Financial Services Reform Act (FSR) administered by ASIC. Financial Service Reform was enacted to increase regulatory protection for consumers purchasing or being advised about financial products.You can visit the ASIC website to learn more about the regulatory environment in Australia and what it means for your protection and consumer rights.
Select the appropriate link below for information about how NZForex can help you with your specific foreign exchange needs.
Foreign exchange for business General Exporters Importers
Foreign exchange for individuals General Overseas Purchase Living Overseas/Expatriates Migration Investments/Pensions
How do I transfer funds with NZForex?Dealing with us is simple. You register on the website and then log in. When logged in you can get quotes, add beneficiary details and book deals/funds transfers. After you register, an NZForex representative will call you to discuss your transfer(s) and make sure the system is set up correctly for your needs. You will also be able to ask any questions you may have about the service and process at this time. You can lock in rates prior to us having your funds for currencies if we can receive funds overnight or you leave a small deposit. If it will take longer for funds to reach us, it is better to send the funds to us prior to booking the exchange rate. Once we have the funds, you will be advised and can then lock in the exchange rate. Please note we do not support transfers in Indian Rupees, Indonesian Rupiah, Phillipine Peso, Thai Baht, Pakastini Rupee, Iraqi Dinar (and a number of other currencies) at this stage.
Benefits of using NZForex
No bank queuesOne of the great things about our service is that you can complete an international transfer without leaving your office or home. We give you a variety of ways to get your funds to us so we can send the international transfer as quickly as possible.
Unbeatable rates & low fees ? Yes please!Not only do we take the hassle out of your international transfers but we do it with low (or often no!) fees. We charge a maximum fee of NZ$ 15 for payments, and will waive the fee altogether on transactions that exceed NZ$ 10,000 per beneficiary. Click here for more details on fees.
Exchange rates - a simple guarantee. We will not be beaten!There is no need to shop around, our rates will be good straight up.
Security of your moneyThe safety of your money is an important consideration when deciding which provider you use to send money internationally.NZForex is a brand of OzForex Pty Ltd, a leading Australian foreign exchange provider. When dealing through NZForex you are transacting with OzForex. OzForex holds an Australian Financial Services Licence (AFSL) issued by ASIC to deal in foreign exchange. This licence can be viewed by following this link to the ASIC website: (AFS Licence number 226 484)OzForex offers a safe and regulated alternative to the banks for transferring funds. Our business effectively transits money from customer to beneficiary via leading financial institutions. We do not pay out client transfers until clients have paid OzForex which means we have no settlement risk on transfers. As we do not carry any overnight market risk, unlike some other providers, we do not suffer losses resulting from exchange rate movements and so you can feel comfortable that your transfer will reach the recipient on time, every time. Your funds are held in accounts with major financial institutions and are only released once your outward payment has been sent. OzForex is a trusted provider to thousands of customers world-wide who have enjoyed the benefits of excellent rates and low fees without compromising on service.Foreign exchange dealing is regulated in Australia by the Australian Securities and Investment Commission and companies providing services to deal in foreign exchange should be able to show they hold an Australian Financial Serviced Licence. You should not deal with a foreign exchange provider that cannot demonstrate in writing that they are regulated.Recent changes to the regulatory environment have seen foreign exchange regulation brought under the Financial Services Reform Act (FSR) administered by ASIC. Financial Service Reform was enacted to increase regulatory protection for consumers purchasing or being advised about financial products.You can visit the ASIC website to learn more about the regulatory environment in Australia and what it means for your protection and consumer rights.
Forex Tutorial - A Short Introduction To FOREX
Forex Tutorial - A Short Introduction To FOREX
FOREX is the world’s largest and most liquid trading market. Many consider FOREX as the best home business you can ever venture in. Even though regular people have had
Best Forex Trading Books
the opportunity to take part in trading foreign currencies for profit (in the same way banks and large corporations do) since 1998, it is just now becoming the cool, hip, new "thing" to talk about at parties, business events, and other social gatherings.
Even though it has been somewhat of a loosely guarded secret, every day more and more investors are turning to the all-electronic world of FOREX trading for income and profit because of its numerous benefits & advantages over traditional trading vehicles, like stocks, bonds and commodities.
But, still, whenever something seems new or is just becoming a part of social conversation, news articles, and water cooler gossip, misconceptions have to be overcome, the mind has to be open and the slate has to be clear for starting out fresh with the CORRECT information.
So, in this article, it is my attempt to give you some solid, but not over-detailed, information on just what the heck "FX" (FOREX) means, what it is, and why it exists.
As a successful trader said, Trading FOREX is like picking money up off the floor
Not trading FOREX is like leaving it there for someone else to pick up." Others in the industry have also said, Trading FOREX is like having an ATM machine on your own computer.
Here's an explanation (one I feel you'll appreciate) of what FOREX is and how a bunch of traders, profit from it:
The Foreign Exchange Market, also referred to the "FOREX" or "FX" market, is the spot (cash) market for currency.
But, don't mistake FX as trading the futures market, where you buy a contract to purchase a particular currency at a future price in time.
What FX traders do is much less risky than trading currencies on the futures market, much more profitable, and a lot easier, than trading stocks.
So, you're probably wondering where it's at ... or ... how to access the FX market?
The answer is: FX Trading is not bound to any one trading floor and is not centralized on an exchange, as with the stock and futures markets. The FX market is considered an Over-the-Counter (OTC) or 'Interbank' market, due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.
Yes, if that's the first time you've heard about an all-electronic market, I know this may sound somewhat intriguing to you.
Here's what you are actually trading when you participate in the Foreign Exchange (FOREX) market:
Essentially, like the large banks who use the FX market to protect themselves from the fluctuating exchange rate of different currencies, as an investor, what a FX trader is doing is simultaneously exchanging one countries currency for another. So, in actuality, they're electronically trading a currency-pair and the price that is quoted to us is the exchange rate between the two currencies.
In other words, simply the quoted price is how many of the one currency is worth 1 of the other currency.
Example:
EUR/USD last trade 1.2850 - One Euro is worth $1.2850 US dollars.The first currency (in this example, the EURO) is referred to as the base currency and the second (/USD) as the counter or quote currency.
The FOREX has a DAILY trading volume of around $1.5 trillion dollars - 30 times larger than the combined volume of all U.S. equity markets. This means that 1,498,574 skilled traders could each take 1 million dollars out of the FOREX market every day and the FOREX would still have more money left than the New York Stock exchange every day!
The FOREX plays a vital role in the world economy and there will always be a tremendous need for the FOREX. International trade increases as technology and communication increases. As long as there is international trade, there will be a FOREX market. The FX market has to exist so a country like Japan can sell products in the United States and be able to receive Japanese Yen in exchange for US Dollar.
There's plenty of money to be made using FOREX for plenty of traders that use the right trading techniques / tactics that will allow them to profit immensely. And, with only 5% of the daily turnover of volume coming from banks, government and large corporations who need to hedge, the other 95% is for speculation and profit.
About The Author : Adrian Pablo : Forex trader and freelance writer. http://www.1-forex.com Forex Tutorial - A Short Introduction To FOREX
FOREX is the world’s largest and most liquid trading market. Many consider FOREX as the best home business you can ever venture in. Even though regular people have had
Best Forex Trading Books
the opportunity to take part in trading foreign currencies for profit (in the same way banks and large corporations do) since 1998, it is just now becoming the cool, hip, new "thing" to talk about at parties, business events, and other social gatherings.
Even though it has been somewhat of a loosely guarded secret, every day more and more investors are turning to the all-electronic world of FOREX trading for income and profit because of its numerous benefits & advantages over traditional trading vehicles, like stocks, bonds and commodities.
But, still, whenever something seems new or is just becoming a part of social conversation, news articles, and water cooler gossip, misconceptions have to be overcome, the mind has to be open and the slate has to be clear for starting out fresh with the CORRECT information.
So, in this article, it is my attempt to give you some solid, but not over-detailed, information on just what the heck "FX" (FOREX) means, what it is, and why it exists.
As a successful trader said, Trading FOREX is like picking money up off the floor
Not trading FOREX is like leaving it there for someone else to pick up." Others in the industry have also said, Trading FOREX is like having an ATM machine on your own computer.
Here's an explanation (one I feel you'll appreciate) of what FOREX is and how a bunch of traders, profit from it:
The Foreign Exchange Market, also referred to the "FOREX" or "FX" market, is the spot (cash) market for currency.
But, don't mistake FX as trading the futures market, where you buy a contract to purchase a particular currency at a future price in time.
What FX traders do is much less risky than trading currencies on the futures market, much more profitable, and a lot easier, than trading stocks.
So, you're probably wondering where it's at ... or ... how to access the FX market?
The answer is: FX Trading is not bound to any one trading floor and is not centralized on an exchange, as with the stock and futures markets. The FX market is considered an Over-the-Counter (OTC) or 'Interbank' market, due to the fact that the entire market is run electronically, within a network of banks, continuously over a 24-hour period.
Yes, if that's the first time you've heard about an all-electronic market, I know this may sound somewhat intriguing to you.
Here's what you are actually trading when you participate in the Foreign Exchange (FOREX) market:
Essentially, like the large banks who use the FX market to protect themselves from the fluctuating exchange rate of different currencies, as an investor, what a FX trader is doing is simultaneously exchanging one countries currency for another. So, in actuality, they're electronically trading a currency-pair and the price that is quoted to us is the exchange rate between the two currencies.
In other words, simply the quoted price is how many of the one currency is worth 1 of the other currency.
Example:
EUR/USD last trade 1.2850 - One Euro is worth $1.2850 US dollars.The first currency (in this example, the EURO) is referred to as the base currency and the second (/USD) as the counter or quote currency.
The FOREX has a DAILY trading volume of around $1.5 trillion dollars - 30 times larger than the combined volume of all U.S. equity markets. This means that 1,498,574 skilled traders could each take 1 million dollars out of the FOREX market every day and the FOREX would still have more money left than the New York Stock exchange every day!
The FOREX plays a vital role in the world economy and there will always be a tremendous need for the FOREX. International trade increases as technology and communication increases. As long as there is international trade, there will be a FOREX market. The FX market has to exist so a country like Japan can sell products in the United States and be able to receive Japanese Yen in exchange for US Dollar.
There's plenty of money to be made using FOREX for plenty of traders that use the right trading techniques / tactics that will allow them to profit immensely. And, with only 5% of the daily turnover of volume coming from banks, government and large corporations who need to hedge, the other 95% is for speculation and profit.
About The Author : Adrian Pablo : Forex trader and freelance writer. http://www.1-forex.com Forex Tutorial - A Short Introduction To FOREX
How do I choose my FOREX broker
How do I choose my FOREX broker
There are so many Forex brokers and services out there, that it is quite overwhelming to try and choose one.The trick is to understand what is most important to you while trading, and then to find the broker that best matches your demands.
Your demands are probably comprise of several factors, financial, technological and even psychological, feeling you must trust the broker you choose to deal with.To help lay out all these factors we generated our comparison table, which includes, what are in our opinion, the key questions you have to ask when choosing a broker. More importantly, this table supplies the answers.
We bring to the table our own experience with these brokers, making it possible for us to say how easy their systems are to use, what was needed from us to open an account, what we were offered back in return, how satisfied we were from their customer support, and how serious a company they actually are.
Once you feel that your main demands have been answered, and you are able to narrow down your choice to 2 or 3 brokers from the list, you should go on to reading the full reviews of our experience with them. The reviews will tell you more about WHAT these brokers have to offer and HOW they offer it to you.
Another powerful tool is reading what other traders have to say about their experiences. Always check out their opinions in our forum discussion rooms, and feel free to ask questions you feel you do not have answers to yet.
To help narrow down the selection, we prepared the list of our featured sites. Again, this is based on our own experience with these brokers, and these are the brokers we feel we can recommend to others to choose.
While this site is based on our own experience, we realize that at times others may encounter different experiences with the same brokers or service providers. If your experience was different than ours, please share it with us, so we can go on sharing objective information with all our users.
Good luck, and good profits!
There are so many Forex brokers and services out there, that it is quite overwhelming to try and choose one.The trick is to understand what is most important to you while trading, and then to find the broker that best matches your demands.
Your demands are probably comprise of several factors, financial, technological and even psychological, feeling you must trust the broker you choose to deal with.To help lay out all these factors we generated our comparison table, which includes, what are in our opinion, the key questions you have to ask when choosing a broker. More importantly, this table supplies the answers.
We bring to the table our own experience with these brokers, making it possible for us to say how easy their systems are to use, what was needed from us to open an account, what we were offered back in return, how satisfied we were from their customer support, and how serious a company they actually are.
Once you feel that your main demands have been answered, and you are able to narrow down your choice to 2 or 3 brokers from the list, you should go on to reading the full reviews of our experience with them. The reviews will tell you more about WHAT these brokers have to offer and HOW they offer it to you.
Another powerful tool is reading what other traders have to say about their experiences. Always check out their opinions in our forum discussion rooms, and feel free to ask questions you feel you do not have answers to yet.
To help narrow down the selection, we prepared the list of our featured sites. Again, this is based on our own experience with these brokers, and these are the brokers we feel we can recommend to others to choose.
While this site is based on our own experience, we realize that at times others may encounter different experiences with the same brokers or service providers. If your experience was different than ours, please share it with us, so we can go on sharing objective information with all our users.
Good luck, and good profits!
Subscribe to:
Posts (Atom)
