Archive for October, 2008.
Posted on October 22nd, 2008 by admin in
General
To many people that sounds amazing, and perhaps it is. It can be very profitable for investors and fortunes have been made by many. The incentive to learn forex trading is the oldest incentive by far, the incentive to make profit. If you learn forex trading you are learning how to make your money make more money for you, the goal of all investors.
If you choose to learn forex trading online you are not alone since thousands of people choose this method every year. If you learn forex trading online you have the benefit of choosing an instructor from almost anywhere in the world, or to choose multiple instructors. When you learn forex trading in this fashion your virtual classmates could be from England, Hong Kong, Singapore, Paris, or any other exotic locale that you may have only read about in the past. Obviously this diversity of culture and knowledge will be beneficial. During online chats and student discussions questions will be raised that you may not have thought of yourself, and you’ll be able to benefit by hearing the answers.
The ultimate goal of forex trading is to trade currency in a consistent manner that will result in profit. For instance, buying Euros with US dollars and then selling the Euros for more than you gave for them when the market changes. This is the oldest rule of business, buy low and sell high. If you learn forex trading you’ll be able to do this on a scale you never would have thought possible, limited only by the amount of investment funds you have and by market conditions.
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Posted on October 19th, 2008 by admin in
General
When you start Forex trading, it is important to learn the basics of money management. If you just decide how much money you can afford to lose on a single trade, and start trading without any system, then you are not trading you are gambling. Forex trading is not about gambling and trying to win the jackpot, it is about making consistent profitable trades. Unless you manage your money properly while trading the Forex, then you just as well play the casinos in Las Vegas instead.
Some gamblers do make money in casinos, but many more people lose their money. The only people who consistently make a profit from gambling are the casino owners. Even when gamblers do win, the casino owners often bribe them with free hotel rooms, free food and drink etc. to carry on gambling, and in the end they lose all their money to the casino. When you trade the Forex, you need to think like the smart casino owner, not like a gambler.
In any enterprise, it is always easier to lose money than to make it, and trading the Forex is no different. For example, suppose you lose 50 percent of your bankroll on a trade. Now you have only 50 percent left to trade your way back to where you started. And what happens if you lose the other 50 percent on your next trade? Gamblers often talk about winning streaks and losing streaks. When they think they are on to a winning streak they keep on staking all of their winnings on the next roll of the dice or spin of the roulette wheel – and what happens? You’ve guessed it, they lose all their money, and end up broke. In Forex trading you can never rely on winning streaks, but losing streaks are a very real and ever present danger.
Suppose you have a trading system that returns a profit 70 percent of the time. You would expect 7 out of 10 trades to make a profit, and 3 out of 10 trades to make a loss. However this ratio is only true if you average out the results of hundreds or even thousands of trades. So if you make 100 trades, you will probably make close to 70 profitable trades and 30 losing trades. But what if you start trading, and your first 10 trades are all losing trades?
The answer is you must only trade with a small percentage of your trading bankroll. For example, suppose you have a starting capital of $10,000. See what will happen if you make 10 consecutive losing trades (trading with 10 percent of your bank on the left, and 5 percent of your bank on the right):
10 Percent 5 Percent
Bank Trade Bank Trade
$10,000 $1,000 $10,000 $500
$9,000 $900 $9,500 $475
$8,100 $810 $9,025 $451
$7,290 $729 $8,574 $429
$6,561 $656 $8,145 $407
$5,905 $591 $7,738 $387
$5,314 $531 $7,351 $368
$4,783 $478 $6,983 $349
$4,305 $430 $6,634 $332
$3,874 $387 $6,302 $315
If you started with $10,000 in your bank, and trade with 10 percent of your bank each time, then you would have $3,874 - $387 = $3,487 left in your bank after 10 losing trades. But you would have $6,302 - $315 = $5,987 left in your bank if you traded with just 5 percent each time. (Of course if you had traded with $1,000 each time, you would be cleaned out after 10 losing trades.)
If your system returns 50 percent profitable trades, and 50 percent losing trades, then you would expect to get 10 consecutive losing trades once in every 1024 trades. (And they might be your very first 10 trades!) If your system returns 70 percent profitable trades, and 30 percent losing trades, then you would expect to get 10 consecutive losing trades once in every 169,350 trades. This is not very likely to happen in your first 10 trades, but it is still more likely than your chances of winning your state or national lottery. This also demonstrates the importance of developing a system that returns a high percentage of profitable trades.
By risking no more than 5 percent of your bank at any one time, you should be able to ride out even long losing streaks. The other advantage is, as the overall amount in your bank increases you can trade with larger margins, and hence make larger profits. Note: When you trade with an odd amount, e.g. 5 percent of $6,302 = $315, always round down. So you would buy 1 mini lot at $100 (with a 1 percent margin) and leave the other $200 in your account, just in case the trade moved against you.
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Posted on October 19th, 2008 by admin in
General
If you do a search on “Forex trading systems” in any internet search engine, you will see thousands of ads for the perfect trading system. Many of then state you can make big profits every day, and promise you will never make a single losing trade. The advertisers then go on to tell you they will sell you their secret system for just $5,000. Now anyone who says they never make a losing trade is talking baloney. In any case, if their system is so wonderful and they are such a smart trader, why would they need your money?
Without a doubt, some of these systems do work, but it is far better for you to develop your own personal trading system. Use your $5,000 to fund your trading account instead. If you develop your trading system using a free demo account, it won’t cost you a cent. Although you can never expect every one of your trades to make a profit, you can ensure you make many more profitable trades than losing trades. It is not very difficult to develop a profitable trading system. The difficult part is sticking to your system, no matter what, and this is where many inexperienced traders fail.
The main aim of any trading system is to identify trends as early as possible to gain maximum advantage from them. While at the same time, avoiding false trends and blips, where the market stands still or even moves against you. The earlier you catch a trend the more likely it is to be a false trend. However, if you wait until you are certain of your trend, before you start trading, the more likely the market is to stand still, or even move against you.
A good method to identify trends early is by using moving averages. Use two moving averages, a fast moving average (i.e. averaging over a small number e.g. 5, of time periods), and a slower moving average (i.e. averaging over a larger number e.g. 10, of time periods). Plot both on the same chart, and find the point where they cross over. This is called the “moving average crossover” system. When you have identified what you think is a trend, then you need to confirm it by taking into account other market indicators in addition to moving averages. By using at least two different indicators is the best method of avoiding false trends and blips.
Always decide how much you are prepared to lose on your trade, before thinking about how much profit you will earn. You must allow some for at least some movement against you, but at the same time you don’t want to risk losing too much on your trade. When you have decided how much you are prepared to lose, you can set up a stop-loss order. Finally, you need to decide at what price you will open your trade, and also at what price you will close your trade to get maximum profit. Whatever you decide, always stick to your decision, even if the trade moves against you.
You must develop a successful trading system, (by demo trading) that gives you consistent profits. Provided you develop the system while demo trading, you should not be influenced by emotions (e.g. worried about what will happen if you lose all your money). When you have perfected your system, write it down. Write down your stop-loss amount (e.g. if the price falls by 30 pips), and when you will close your trade (e.g. if the price rises by 50 pips). You must test your system for at least 2 months using a free demo account before trading for real. Always stick to your system, and remember, trading systems only work if you have the discipline to stick to them.
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Posted on October 18th, 2008 by admin in
General
Moving averages is one of the most useful of a number of different charting tools, you can use to forecast future Forex prices.
Simple Moving Average (SMA)
The simple moving average is calculated by dividing the sum of the past N period, closing prices by the number of periods. Moving averages all operate with a delay, because you are using price data from the past to try and forecast what will happen in the future. (N.B. There is no absolute guarantee that past trends will continue into the future.)
For example, suppose you want to plot the 5 period simple moving average on a 30 minute chart. This will be the average of the closing prices of the last five, 30 minute periods. (Your charting software will do all of this for you, the examples below are for information only.)
Examples of Simple Moving Average calculations for the GBP/USD currency pair:
10 Minute 30 Minute 1 Hour
Time Quote Time Quote Time Quote
10:00 1.9722 10:00 1.9722 10:00 1.9722
10:10 1.9723 10:30 1.9726 11:00 1.9730
10:20 1.9725 11:00 1.9730 12:00 1.9732
10:30 1.9726 11:30 1.9731 1:00 1.9720
10:40 1.9728 12:00 1.9732 2:00 1.9716
SMA 1.9725 SMA 1.9728 SMA 1.9724
The 5 period moving average on a 10 minute chart for the GBP/USD currency pair = 1.9725.
The 5 period moving average on a 30 minute chart for the GBP/USD currency pair = 1.9728.
The 5 period moving average on a 1 hour chart for the GBP/USD currency pair = 1.9724.
The longer the period you use to calculate your moving average, the smoother the chart. However, the longer time period also makes your moving averages slower to react to price changes. This is especially the case with simple moving averages, where the contributions to the moving average is the same for all the individual periods.
A single moving average is of little use. In order to find the price trends in the Forex market you need to plot a series of moving averages.
Exponential Moving Averages (EMA)
Simple moving averages are a very good tool for quickly establishing Forex market trends. However, they are very susceptible to spikes, and also rely just as much on older prices as newer prices. In your Forex technical analysis you need to base your forecasts on the most recent prices available. In other words you need to base your forecast on what traders in the Forex market are doing right now, not on what they were doing yesterday, or last week, or last month.
Exponential moving averages give us a method of placing more emphasis on recent currency quotes, than on earlier quotes.
Suppose the daily closing prices for the GBP/USD are:
Day1 1.9722
Day2 1.9727 (1.9650)
Day3 1.9737
Day4 1.9742
Day5 1.9747
The 5 period simple moving average, on a 1 day chart is 1.9735. This is higher than the price on Day1 and suggests a rising trend for the GBP/USD pair. Now, suppose the quote for Day2 was 1.9650, perhaps due to an interest rate change by the Bank of England. The simple moving average would then be 1.9720, pointing to a downward trend for the GBP/USD currency pair. (Although the price has since increased consistently from Day2 through Day5.)
The answer is to use the exponential moving average that places more emphasis on the more recent prices. In other words, the exponential moving average, places more reliance on what the market is doing now.
In the above example, with Day2’s closing price at 1.9650, the exponential moving average would be 1.9723, with a weighting factor (α) of 0.1, and 1.9726, with a weighting factor of 0.2. (The higher the weighting factor, the more the emphasis on recent prices).
You need not be concerned with the nuts and bolts of calculating exponential moving averages, because your charting software should do all this for you.
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Posted on October 18th, 2008 by admin in
General
The object of Forex analysis, is to try and predict which way the market is likely to move. If you get your predictions right, you will make a profit, but if you get them wrong and you will lose your money. There are two types of Forex analysis, Fundamental Analysis and Technical Analysis.
Fundamental analysis involves taking into account the social, economic and political forces that influence the value of a particular country’s currency. If the economy of the country is strong, and the country has a stable government, then the value of that country’s currency can be expected to rise against the currencies of countries with weaker economies.
The most extreme example of a country with a weak (collapsed) economy (at the time of writing - early 2008) is Zimbabwe. The poor state of Zimbabwe’s economy is largely due to horrendous government, with the theft of farm land and plundering of Zimbabwe’s currency reserves by corrupt government officials. The rate of inflation in Zimbabwe is currently over 1,000 percent, so that the currency loses over 90 percent of its value every year. The value of Zimbabwe’s currency is so low, that its value is now literally worth less than the paper it is printed on.
Even in stable healthy economies however, the actions of in particular, reserve banks (e.g. Federal Reserve in the U.S, Bank Of England in the UK etc.) can influence the value of the currency.
Technical analysis involves examining currency prices over a period of time to try and identify trends and patterns. For example, if the value of a particular currency has been steadily increasing over a period of several weeks, then it is likely that the trend will continue in the future, at least in the short term. The trend is the most important aspect of technical analysis. If you can correctly identify a trend, and trade in the same direction you are likely to make profitable trades. Also, the earlier you identify a trend, the more chance you have of making profitable trades.
Ideally, you need to employ both fundamental and technical analysis in your Forex trading.
For example, suppose you were charting the value of the UK pound (GBP) against the U.S. dollar in October - November 2007, using technical analysis only. You would have noticed that for several consecutive days, the GBP was increasing against the USD by around 100 pips every day. So, on November 8, 2007 (the first Thursday in November), you discover the Forex quote: GBP/USD = 2.1104/2.1109. You figure, that by the end of the trading day this should have increased to around: GBP/USD = 2.1204/2.1209. So you buy one standard lot at a rate of 1 GBP = 2.1109 USD, = 47373 GBP. You expect the GBP to rise by 100 pips, so you can sell your 47373 GBP for 2.1204 USD each = $100,450 and earn a nice $450 profit on the day’s trading.
You check the exchange rate a few hours later and you discover that it has moved against you, and the Forex quote: = 2.0906/2.0911. You decide to cut your losses, and sell your 47373 GBP for 2.0906 USD each = $99,294. So instead of making $450 profit, you make a loss of $100,000 - $99,294 = $706. So what happened? The Bank of England sets the UK base interest rate on the first Thursday of every month. On Thursday November 8, 2007, The Bank of England was expected to increase the UK base interest rate, and hence lower the UK inflation rate and increase the value of the GBP. However, the Bank of England unexpectedly left the UK interest rate on hold, which caused the GBP to fall in value instead.
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Posted on October 17th, 2008 by admin in
General
Choosing Your Account Type
If you are trading the Forex part time as a (hopefully paying) hobby, then you can open an account in your own name. However, if you intend to trade the Forex full time, as a full time income earner, then it is best to open a business account. Of course you can use your own name as the name of your business. Opening a business account makes it easier when dealing with the IRS (HMRC in the UK).
You will also need to decide whether you want to open a standard account, (dealing in standard lots of $100,000) or a mini account (dealing in mini lots of $10,000), or if available, a micro account (dealing in micro lots of $1,000). Always aim to open the smallest account possible when you first start trading. If you want to trade with larger amounts, you can simply trade with more than one lot at a time.
Make sure you read, and understand the fine print. Also make sure you open a Forex Spot account, and not a “forward” or “futures” account. After all, you want to be able to trade in real time.
You will most likely need to print and fill out paper forms, and mail or fax them back to your broker before you can start trading. When your broker has approved your application they should contact you with instructions on setting up your account. They will also explain how you can fund your account. They should also send you your user name and password so you can log onto your account online.
Warning: Only trade with real money after at least two months practice with a free demo account.
Maximizing Your Chances Of Success
You must be realistic. Although the Forex has the potential for making large profits, it is not a get rich quick scheme. You are not going to profit from all of your Forex trades. Even the most experienced Forex traders sometimes get it wrong and make losses. The best you can aim for is to make more profitable trades than losing trades.
Don’t trade with money you cannot afford to lose. You should have at least 10 times your margin in your account. If you lose all the money in your Forex trading account, it should not leave you broke, without cash to buy food or pay your electric bill. Do not expect to open an account with a couple hundred dollars today and become a millionaire by tomorrow.
In reality, only a very small number of Forex traders are successful. The reason most traders fail is because of one or more of the following:
They do not have the discipline to demo trade for long enough.
They expect to profit from every trade.
They are reckless, and trade with money they cannot afford.
They let their emotions influence their trading strategy.
They trade with margins that are too small, i.e. too much leverage.
They don’t take their trading seriously enough, and don’t trade in a businesslike manner.
They try to make bigger profits by taking unwise risks.
They start trading with (and losing) real money, before they have learnt their craft properly through demo trading.
They start trading with multiple currency pairs, before they are competent with just one currency pair.
It is essential that you become competent demo trading, before you risk one penny of real money. Would you expect to become a doctor, surgeon or a lawyer overnight? So don’t expect to become a competent Forex trader overnight.
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Posted on October 17th, 2008 by admin in
General
When you start trading the Forex, you need to make sure that you choose a broker or brokerage firm that is registered with the relevant regulatory bodies. (It is no good if you discover that your broker is unregistered, after they have stolen all your money!)
In the U.S. Forex brokers should be registered as Futures Commission Merchants (FCM) with the Commodity Futures Trading Commission (CTFC) and should be a member of the National Futures Association (NFA). You can check out the status of your prospective broker on the NFA’s web site: nfa.futures.org/basicnet/.
In the UK, look for Forex brokers who are registered with the Financial Services Authority (FSA). Check out UK based Forex brokers on the FSA’s web site: fsa.gov.uk/register/home.do.
You need to check that your broker provides adequate support. At a very minimum, make sure your broker offers 24 hour telephone and email support. It is a good idea, before you choose a particular broker, to contact the help lines of a number of brokerage firms. Ask them a question about their service. You need to discover how quickly they reply, and also if they answer your question to your satisfaction. This will give you a good indication of the quality of their help if you need it later. (Of course the quality of the help before you open the account, does not definitely prove that you will receive the same quality of help afterwards.)
If you intend to trade the Forex using your own computer, then you need to make sure that your broker offers online trading facilities. You also need to be able to view Forex quotes in real time. It is no good if the Forex quote displayed on your brokers site is: GBP/USD = 1.9714/1.9719, but when you open a trade, each GPB costs you $1.9740. If it turns out the displayed quote, was the exchange rate 30 minutes ago, then you need to find yourself another broker.
You also need to be able to view your account, including used and unused margins in real time.
When you place an order to trade, you must be able to buy or sell at the currently quoted price. In other words your broker must use a WYSIWYG display. (WYSIWYG is short for “What You See Is What You Get” and is pronounced wiz-ee-wig).
Your broker will offer one of two types of online access. Each of these has both advantages and disadvantages. The first type is web based software - this is hosted on your broker’s web site. With web based software, you can log onto your account from any computer with Internet access, e.g. your own computer, Internet café, office computer etc.
The second type is a client based software program running on your own computer. You can only log onto your account from your own computer. (Unless you install the software on other computers - N.B. this is usually contrary to the terms of service). The advantage of client based systems is they are usually faster than web based systems. The disadvantage (for Mac users), is the software is usually only available for Microsoft Windows systems.
It is essential that you have a fast Internet connection (i.e. DSL or broad-band). Dial-up is simply too slow, and by the time you open your Forex trade, the quote will have most probably changed form the quote on the display.
You need to find a broker that offers Mini- and/or Micro- lots. You can open accounts trading these smaller lots for just a couple hundred dollars. Some brokers offer fractional lot sizes (called odd lots), so you can create your own trading unit size. You also need to make sure your broker offers trading pairs in all seven major currencies: USD, EUR, JPY, GBP, CHF, CAD and AUD.
Look for a broker that offers the smallest bid/ask spreads. The bid/ask spread is normally 5 pips, but some brokers offer spreads of only 3 pips or even 2 pips. What is your broker’s margin requirement? This may be anything from 0.25 percent to about 5 percent. Remember - smaller margins mean you need to deposit less, and give you greater leverage, but they also have the potential for greater losses.
You need to discover how your broker calculates rollover charges. Rollover charges are charged to your account when your trade extends (rolls over) past the end of the trading day into the next trading day. Rollover charges are based on the difference between the interest rate of the country of the base currency, and the interest rate of the country of the quote currency. For example, for the currency pair CHF/USD, the rollover charges are based on the difference in interest rates between Switzerland (the country of CHF) and the United States (country of USD).
And finally, do your broker’s trading hours correspond with the trading hours of the international Forex?
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Posted on October 16th, 2008 by admin in
General
When you open a trade, you may have other commitments so you cannot spend hours always watching your computer monitor. To get around this, you can set up Forex orders. An order is a request to your broker to buy or sell or to close out your position.
The three most common types of Forex orders are Market Orders, Limit Orders and Stop-Loss Orders.
A Market Order is an order to buy or sell currencies at the current market price. For example, you will normally open a trade by making a market order.
A Limit Order is an order to buy or sell at a certain price. For example, suppose you buy GBP (and sell USD) when the Forex quote: GBP/USD = 1.9710/1.9715 (i.e. you issue a market order.) You could then set up a limit order to sell your GBP, when the Forex quote: GBP/USD = 1.9760/1.9765 (i.e. when the Forex quote has increased by 50 pips). You can also put a time frame on your limit order. For example you can request close the trade at the end of the trading day, whether or not the price has increased by 50 pips (GFD). Or you can request the trade to continue until either the price has increased by 50 pips or you cancel the trade (GTC).
A Stop-Loss order is an order to close the trade, if the market moves against you. Say you buy GBP when the Forex quote: GBP/USD = 1.9710/1.9715. You could make a stop-loss order to close the trade if the Forex quote went below GBP/USD = 1.9690/1.9695. This would limit your losses to 20 pips (plus the bid/ask spread).
An Order Cancels Other (OCO), is a mixture of 2 limit and or stop-loss orders. For example you could set up an OCO to close your position if the Forex quote went below GBP/USD = 1.9690/1.9695, or sell your holding of GBP when the Forex quote: GBP/USD = 1.9760/1.9765.
Good ‘Til Cancelled (GTC) - Keep your trade open until you (issue a market order to…) close the trade.
Good For Day (GFD) - Close your position at the end of the trading day 5 PM EST (or 10 PM GMT).
GTC and GFD are usually used in conjunction with limit orders.
Until you have gained some experience, it is best to use just the first three order types: That is, Market, Limit and Stop-Loss orders. It is especially important that you become used to the Stop-Loss order before you start trading for real. Otherwise, if the trade moves against you, you could lose all the money in your account.
Normally, no reputable broker will let you continue to trade if your account goes (or is about to go) negative. Having said that, in volatile markets currency values can change very quickly, so there is a small possibility, that you could lose more than the just the equity in your account. This is only likely however, when you trade with margins that are too small (e.g. less than 1 percent) i.e. too much leverage, and when you do not have sufficient unused margin in your account.
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Posted on October 16th, 2008 by admin in
General
Now you might be wondering how it is possible to earn big money trading the Forex? The answer is Margin trading. In other words you trade with borrowed money.
Forex is always traded in Lots, so in actual fact you cannot purchase just 100 Euros, (or in fact 100 units of any currency). A standard Lot is $100,000, some brokers offer Mini-Lots of $10,000, and a few brokers also offer Micro-Lots of $1,000. The good news is you don’t need anything like $100,000 to open a Forex account or to trade the Forex.
The Forex market uses a system called Margin trading, where you pay the broker a security margin, usually between 0.25 and 5 percent. The security margin gives you control over a very much larger unit (or lot) of currency. For example, to trade a standard lot $100,000, your broker will probably require a margin (deposit) of 1 percent = $1,000. (In actual fact you will need more than $1,000 in your account, in case the market moves against you.
Take a look at the example below:
Time EUR/USD Value Used Margin
10:00 AM 1.4720/1.4725 $99,967 $1,033
12:14 PM 1.4578/1.4583 $99,002 $1,998
1:00 PM 1.4570/1.4575 $98,948 $2,052
5:00 PM 1.4770/1.4775 $100,306 $0
Suppose you sell $100,000 and buy Euros at 10:00 AM. The Euros will cost $1.4725 each. So you will receive (rounded) 67912 EUR. Your 67912 EUR will have a value of 67912 x 1.4720 = $99,967 (Note: You have lost $33 instantly because of the bid/ask spread.) Now, suppose you sell your Euros at 5 PM and close the trade. You sell your 67912 EUR and buy U.S. dollars. You receive $1.4770 for each Euro = 67912 x 1.4770 = $100,306. So you make an overall profit of $306 on the days trading.
Margin trading is an example of leverage (sometimes called gearing), where you are using a relatively small amount of money to control (or lever) a very much larger amount of money. This enables you to profit (or lose) from very small changes in Forex quotes.
If you trade with $1,000, you will need more than $1,000 in your account. In the example above, if you only had $1,000 in your account to start, you would have a negative amount (-$33) in your account immediately after your trade was opened.
Now, suppose you started with $2,000 in your account:
You sell U.S.$100,000 and buy Euros at 10:00 AM. Your used margin is now $1,033, so the usable margin in your account is $2,000 - $1,033 = $967. Imagine the trade moves against you, so that at 12:14 PM the Forex quote: EUR/USD = 1.4578/1.4583. Your 67912 EUR are now worth 67912 x 1.4578 = $99,002, and the usable margin in your account = $2,000 - $1,998 = $2. This would result in a margin call, and your trade would be closed to prevent your account going negative, so you would lose $1,998.
If however, you had $3,000 in your account, your trade could have continued:
If the trade had continued moving against you so that at 1:00 PM the Forex quote: EUR/USD = 1.4570/1.4575. Your 67912 EUR are now worth 67912 x 1.4570 = $98,948. Your used margin is now $2,052 but you still have $3,000 - $2,052 = $948 in your account, so you can continue trading. If the Euro then recovers, so that at 5:00 PM the Forex quote: EUR/USD = 1.4770/1.4775, you sell your 67912 EUR at $1.4770 each and make an overall profit of $306.
Always aim to have at least twice your margin in your account at all times (even when a trade moves against you). However, it is safer still if you never trade with more than 10 percent of your account at any time.
Margin Percent = 100/Leverage
Leverage = 100/Margin Percent
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Posted on October 15th, 2008 by admin in
General
Currency exchange rates or Forex quote are always quoted in pairs e.g. GBP/USD = 1.9714. The currency on the left is the base currency, and the currency on the right is the quote or counter currency. The base currency is so called because it is the basis of the trade.
The quoted value of the pair is the amount of the quote currency equal to 1 unit of the base currency. In the example above, one GBP (UK pound) = 1.9714 USD (U.S. dollars). If you expect the value of the base currency to increase against the value of the quote currency then you buy the base currency and sell the quote currency. For example, for the currency pair EUR/USD = 1.4722, suppose you expect the value of the EUR to increase against the value of the USD. Then you would purchase Euros (EUR), and simultaneously sell U.S. dollars (USD). (This is also known as going long.)
Now, take the example of the Forex quote CHF/USD = 0.8944, where you expect the CHF (Swiss franc) to fall against the value of the U.S. dollar (USD). In this case you would sell USD, and simultaneously buy CHF. (This is known as going long.)
Forex exchange rate quotes are actually quoted at two slightly different prices. For example the Euro vs. the U.S. dollar might be quoted as EUR/USD = 1.7420/1.7425. The quote on the left is the Bid price, while the quote on the right is the Ask price. The difference between the two quotes is known as the Bid/Ask Spread (or just the Spread). The bid price is the price at which the dealer is prepared to buy the currency from you. And the Ask price is the price at which the dealer will sell you the currency.
So if you purchased a lot of currency, and immediately sold it again before the relative values had changed, you would lose on the deal, but the dealer would gain. Forex dealers earn their commission from the Spread between the Ask and the Bid prices. Forex brokers are therefore in a win/win situation, because it makes no difference whether you profit or lose from your trade (or even if the relative values stay the same) the dealer always profits.
Forex quotes are usually quoted to four decimal places, for example:
USD/EUR = 0.6793
EUR/GBP = 0.7468
GBP/CHF = 2.2041
CHF/AUD = 1.0095
etc.
The one exception to this among the major currencies, is where the Japanese Yen (JPY) is the quoted currency. Then the Forex quotes are usually quoted to just two decimal places, as in the following examples:
USD/JPY = 109.32
EUR/JPY = 160.95
etc.
(This is because the value of the Japanese Yen, is about one hundredth of one U.S. dollar.)
A change of 1 in the last decimal place is called a Pip. A Pip is the smallest amount by which the relative values of two currencies can change. Forex broker commissions, (the Ask/Bid Spread) is typically around 2 to 5 Pips.
During an average day’s trading, a pair of currencies will typically move by between 20 and 50 Pips. However, if the Forex market is volatile much larger changes can occur during a day’s trading. An example of this was the GBP/USD pair, which changed by as much as 100 - 200 Pips on some days in November 2007.
Because daily currency changes in the Forex market, are normally so small, you need to trade with substantial amounts of currency to make a decent profit.
For example suppose you expect the Euro (EUR) to increase against the USD (U.S. dollar). So you decide to purchase 100 Euros when the quote for the EUR/USD = 1.4720/1.4725. 100 EUR will cost you $147.25. Now suppose the EUR increases by 50 Pips against the USD, and later in the day the Forex quote is EUR/USD = 1.4770/1.4775.
So you sell your 100 Euros, and simultaneously buy U.S. dollars. You sell your EUR for 100 x 1.4770 = $147.70. So your profit on the day’s trading is $147.70 - $147.25 = $0.45. Even if you had purchased 1,000 Euros instead, you would still only have made a measly $4.50, on the day’s trading.
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