Posts tagged: Trading

Leverage in Forex Trading

Leverage allows larger operations which could be performed only with our capital. In a single operation that should not risk more than 1-2% of the capital and to maintain this rule, we must take into account the leverage we use in our trading.

If we open an account with 1000 USD and we have a 100:1 leverage, we can use $100,000 (1 Lot) in one operation. Obviously this greatly increases the potential benefits but also potential losses. To maintain the rule of not risk more than 1-2% of the capital, we must put a stop loss at a level that should be reached to assume no more than 10-20 USD. With the volatility we see in the currency market, the stop loss is too small and will be reached very often if you use high leverage. Fortunately there are forex brokers that offer the possibility of trading with micro lots and this will allow us to keep the stop loss at this level as small $10 and have enough flexibility.

Of course, it may happen that we convert our 1000 USD in 2000 very quickly but in the long run, for sure, we can not keep this up and be out of the market by a margin call. It makes more sense to grow our account slower but more stable with adequate risk control. Thus, the gains will be more consistent and stable, and if we want to live the trading that can not be consistently at a high level of risk. For example, if we get an average of 5 pips profit, operating with a micro lot and performed five operations a day, we get approx. 2.5 dollars for beneficial (depending on the pair operated).

In absolute terms this may seem ridiculous but it is not! This gain of 2.5 USD in one day represents a profit of 0.25% on our trading capital in a single day, a really good number. As we continue to operate and be continuing our trading capital will increase and we can increase the amount of each transaction until we can make a profit even be able to afford to live trading.

Technical Trading

It is probably obvious to everyone; commodities can not be bought and sold just so completely random. Commodities to be bought and sold with care every time before we enter into any business, we must have some good and solid reason. Such reasons are quite logical to assume any profit that ideally we want to collect.

To get such a cash profit, the basic assumption is that the market will go in the right direction – and if the market goes in desired direction, the traders will make reasonable profit.

Of course, it is extremely important to note that commodity trading is highly unpredictable and you can never know with certainty what the market will do tomorrow – i.e. whether the market will go up tomorrow, or down and whether you will loss or gain. Nevertheless, we can enter into the market with at least some probability that the market will go in our direction. The higher the probability is, the greater the chances are that the trade will be profitable.

But how do we know when there is a high probability that the market will go in the next few days just by our right direction? You can know this precisely using technical formations and indicators.

Formation and technical indicators are tools that tell us when we should enter the market and when to get off of him and vice versa, we have the greatest likelihood that our business will be profitable.

Technical indicators are easily observable with the naked eye. Throughout history, trade has been proven that technical formation on the chart appear again and again, and under such formation and indicators tools, you can predict reliably which way the market will go in the next few days. Again, it should be noted that not any prediction is correct entirely hundred percent in commodities.

Forex trading and the economy

When you’re dealing with the Forex exchange market you need to consider the economic impact that a country can have on its own currency.  There are many factors that can change the value of its own currency just by letting unemployment rate slip and not being able to come up with a Health Care and economic growth that they need.  There are quite a few things that every country can do to raise the value of their own currency.  Here are few things that will have an economic impact on the value of each country’s currency so you know what you’re getting yourself into before you decide to enter the foreign exchange market.

One thing that can greatly influence the value of currency in a country is the economic policies that they use for international trading.  You have to look at their spending practices as well as their budget in order to determine the value of their money.  This will also reflect on the interest rates that you might have to pay when you are exchanging currency with this country.

You also have to look at the government’s surpluses because they can affect the value of their currency.  If they have too much surplus of any product then obviously they are not selling as much as they would like.  Too much surplus means that they’re not getting the money back into the economy that they need which could lower the value of their currency.

Currency will also lose value of if the inflation rate continues to rise in the country.  The more money than a country needs for its products the less likely other countries are willing to purchase them from that country.  They will find their supplies from a different country where they do not have to pay so much to get the goods they require.