by admin on October 4, 2010
Hopefully now you understand that the forex market behaves a bit different than other markets. Currency markets are highly speculative and volatile in nature.
Any currency can become very expensive or very cheap in a matter of days, hours or sometimes even minutes.
The unpredictable nature of this market is one of the things that attracts traders to the currency market.
With that being said money management is critical and makes the difference between the winners and the losers.
Money Management
Money management is the most significant part of any trading system. Most traders don’t understand how important it really is.
It is important to understand the concept of money management and to understand the difference between it and trading decisions. Money management represents the amount of money that you are going to put on one trade and the risk you are going to accept for this trade.
First of all, your risk per trade should never exceed 3% per trade. It is better to adjust your risk to 1% or 2%, but if you are confident in your trading system then you can adjust it up to 3%.
Secondly, adjust your stop loss so that you never lost more than you are comfortable with on a single trade.
Now you also want to make sure that you diversify your trades between several currencies and not trade just one pair. It is also important that you diversify your orders between currencies that have low correlation.
There are many different money management strategies. It is critical that you adopt the strategies that work for you and use them diligently to help manage your risk.
Using Limit Orders
We understand that forex markets can be volatile and difficult to predict. While limiting the impact of any adverse price movements, using limit orders can help you capitalize on short term price movements.
A limit order is simply a standing amount at which you have instructed you forex firm to buy or sell a position. Setting these limits protects you and your investments.
While there are no guarantees that the use of these types of orders will limit your losses and protect your profits in all market conditions, a disciplined use of market orders will help you reduce the risk that you are taking. It will also give you peace of mind in your trading.
We’ve covered many of the market orders that are available in the forex market. However, keep in mind that not all market orders are available at all online forex brokers.
So when you open your account with a broker or forex firm, make sure the orders that you want to use are available.
by admin on October 4, 2010
Now you most likely won’t be standing amidst a few hundred other screaming stockbrokers on Wall Street, but it is important that you understand some of the terms that you would be hearing if you were. You want to be sure to understand what these terms mean in your trading.
These are some of the most common trading terms:
• Bid/ask spread – also known as the bid/offer spread, is the quote of the price at which the parties involved are willing to buy or sell. The bid price is the price that a party is willing to purchase, while the ask or offer price is the price at which the party is willing to sell the same. The difference between the two prices is considered the spread.
If the spread cannot be closed, then no deal can be made. The forward price (or agreed upon price) and all details involved in the transaction are written in a contract and referred to as forward points. Most of the time it is outlined as available until a certain date and if this transaction isn’t completed by that date (transaction date), then at that time it must be renegotiated.
• Currency Pair – since the value of one currency is only relevant when put in terms of another, forex traders will always deal in currency pairs.
As I mentioned before, the first currency in the pair is considered the ‘base’ currency. The second currency in the pair is the ‘counter’ currency.
• Leverage & Margin – Margin is a good faith deposit that a trader puts up as collateral to hold a position. The amount of margin that a trader puts up determines his leverage.
In other words, when a trader opens a position larger than the amount of funds required to open it, the trader has put down margin to receive leverage.
While margin refers to the amount of funds a trader has put down as collateral, leverage refers to the amount of money he controls relative to the margin.
• Pip – (Percentage in Point) refers to the very last digit of a currency price.
Just for illustrative purposes let’s take the Euro/USD at 1.2635. If the sell price was 1.2638 then we have a 3 pip increase. Should the Euro/USD sell at 1.3635 then we have a 100 pip increase.
• Stop – Limit Order – An order to buy or sell a certain quantity of a certain security at a specified price or better, but only after a specified price has been reached. A stop limit order is essentially a combination of a stop order and a limit order.
• Rollover/ Carry Trade – A popular trading strategy used in the forex market. It guarantees traders at least some return on their medium and longer term positions.
In the carry trade, speculators buy high interest currencies and sell currencies with low interest rates. These positions ensure that each trading day rollover- interest will be posted to the traders account. It has the potential to significantly enhance a return.
Rollover is also sometimes referred to reinvesting any earnings in additional stock or currencies.
• Bear Market – Refers to a strong trend of downward movement in several areas of the market.
• Bull Market – Refers to a strong upward trend in several areas of the market.
• Open Order – Your order remains pending until it is either executed or cancelled.
• Stop Order – Cancels any pending orders that are placed with the broker.
• Market Makers/Jobbers – Stockbrokers who hold or purchase securities at low prices for the purpose of selling them to traders in a higher priced market so that the trader can turn around and resell them for a profit… essentially creating a separate market are called market makers (also known as jobbers in Britain).
• Whipsaw – A term for what happens when the market trends point toward a specific direction, causing a buy or sell and then the opposite effect occurs.
These will happen occasionally and you realistically cannot expect to win with every purchase. My best advice when it happens is to wait it out. The market will rebound and you can still make a profit or at least break even, if you are patient.
Those are just some of the most commonly used terms that I wanted you to be familiar with. It should help you to understand a bit about the market lingo before we get into the meat of the course, where you will learn the details of many of the terms above.
