Category Archives: Forex University

forex university

The Beauty Of Leverage In Forex Trading

When was the last time someone handed you a bundle of cash? If you’re like me, that hasn’t happened in a long time, if ever. This is why Foreign Exchange Trading is such and exciting opportunity. Forex brokers are literally giving you money to trade with, up to $200 for every $1 in your account!

If you’ve traded stocks, you know that you can get up to a 2:1 margin on your account value through most brokers. Put a different way, most stock brokers will let you buy $2000 worth of stock for every $1000 in your account…loaning you $1000 in the process. That sounds like a pretty good deal, right? Buy $2000 of stock, let the stock rise 10% to $2200, sell the stock and pay your broker back the $1000 (plus a bit of interest) and pocket your $200, 20% gain. Not a bad way for things to turn out, a rise of 10% in the stock value gives you a gain of 20%.

Imagine a different scenario. You sign up with a Forex broker and commit $1000 of your account value in a $100,000 trade on the EUR/USD (Euro to US Dollar). You’re using 100:1 leverage in this case. When the EUR/USD exchange rate moves 1% in your favor, you exit your trade for $101,000. After paying the $99,000 (plus a bit of interest) back to your broker, you’re left with about $2000. Starting with $1000 and ending with $2000 is a 100% profit, triggered by a 1% move during your trade!

Think about the effects of leverage for a minute. This is the reason why it’s no joke when I say trading Forex can turn $300 into $10,000 in less than a month.

Now that I’ve got you excited, let’s throw a bit of water on the fire. If you’re using 100:1 leverage, a trade that moves 1% against you can be devastating. This is why you absolutely must get educated about trading Forex before you commit money. With the proper strategies to set up your trades, you minimize the risk of having losing trades. Even more importantly, with the proper money management and trade exit strategies, you eliminate the possibility that a couple of bad trades can wipe out your account.

A good Forex trading system EXPECTS TO LOSE some of the time. Anybody can make money when they’re winning all their trades. Only someone with the proper education and discipline can make money when they only win half their trades…everyone else gets wiped out.

Don’t get wiped out. Forex is an amazing money making opportunity. Get educated, do it right, and build your wealth safely.

How to Pick the Right Forex Broker

Here is a short but useful (especially to beginners) article I’ve found written by a fellow forex trader named Davion Wong. Enjoy, and apply these rules!

By Davion Wong
Published: November 26, 2007

Picking the right forex trading broker can be a tedious exercise for most traders. There are more than a hundred online brokers today and more are coming on board. Since the foreign exchange market is worth trillions of dollars, it offers lucrative opportunities for brokers to set up their firm online. The challenge is with too many choices, it is hard to decide which is best for you. This piece of information would provide you with the necessary tips to pick an ideal forex trading broker.

Since the foreign exchange market is decentralized, it can be hard to identify fraudulent practices by unscrupulous brokers. When finding a broker, do make sure to follow the following pointers and your chances of finding an honest and reliable forex trading broker are dramatically increased!

1. Always request for references that you can speak with.

2. Do a check with the local regulatory agencies and make sure that the forex trading broker is registered. For US-based brokers, see if they are registered as Futures Commission Merchants (FCM) with the Commodity Futures Trading Commission (CFTC) and registered with National Futures Association (NFA).

3. Compare the account details such as the minimum deposit required, leverage, spreads and so on. Ask them specifically are there any commissions chargeable, lot fees, etc. This is to ensure you do not incur hidden costs. Some sneaky traders deliberately give you an impression that they are the cheapest to use but in actual fact load you on hidden charges.

4. The trading platform needs to be user-friendly. Many traders especially first-timers find it challenging to navigate around the site just to make sense of the charts and currency prices. If there are demo accounts, try them.

5. REQUOTING. This is a big pitfall that many traders fell into before realizing. Low spreads and commissions do not mean much if the forex trading broker decides to “trick” you with requoting. Basically, what it means is that when you transact with a buy/sell call for a currency pair at a certain price, the broker requotes and charge you on the requoted price rather than what you see.

The difference in transacted prices can be as much as 9 pips and beyond. Be wary of those dealers that keep requoting when you are making huge gains! It is common to have occasional ones but when it happens way too often, you should smell a rat. Always choose one that have a “no requoting” policy.

Well, now you are in a better position to find an ideal broker to work with. Be adventurous and start your search now. While forex trading carries risks, it is also a place where people make their riches.

Support the writer of this great article by visiting Davion’s wildly popular Forex Trading Made Easy blog.

Forex Money Management

Why Money Management?

Best system will fail in long-term if it is without proper money management. On the contrary, bad system can turn profitable if used with a good money management. Currency trading always go through the cyclical ups and downs, where winning and losing are just part of the game. However, with the right money management, you might be able to hold onto your winnings, while minimizing losses during bad times.

Have you ever wondered why you made so much profit so easily only to lose all of it plus your principal in a flash? Then you’re trading without a proper money management. You’ve got to be disciplined, or your winnings are guaranteed to lose sooner or later. Learn these money management techniques today!

Alexander Elder’s 2% and 6% Rules

First and foremost, note down your account equity at beginning of the month. Then compute 2% and 6% of the account equity. For example, if your account equity at the beginning of the month was $100,000 then 2% of $100,000 was $2,000, and 6% of it was $6,000. But what are these numbers used for?

Firstly, you should never risk more than the 2% per trade. This will protect you from blowing up your account from just a few bad trades. In this example, the maximum loss of any single trade allowed is $2,000 (the 2% of $100,000). Make sure that you don’t expose more than that in any trade. To enforce this rule, you have to set stop loss to limit the loss at $2,000 or less. That is usually a stop loss of at most 200 pips for a 1-lot contract or at most 50 pips for 4-lot contract. Remember that you can always set stop loss less than the 2% or execute multiple trades. Just make sure it is not larger than that.

In addition to the 2% rule, you are allowed to risk a maximum of 6% of equity in one month. In this example, allow yourself to lose not more than $6,000 (the 6% of $100,000). You may open multiple trades running concurrently, but make sure that in total you are not exposing more than $6,000. Any time you see drawdown of current month exceeds $6,000, stop trading until next month. Then in the new month, you’ll have another 6% to risk. Always check that if all the open trades are lost, they won’t take more than the %6.

Assuming at the start of ‘new’ month, your account equity is now down to $94,000. The 2% of $94,000 is $1,880 and the 6% is $5,640. In this ‘new’ month, you may risk a max of $1,880 per trade and a max of $5,640 per month. You have to set stop loss to all trades to make sure that these rules are always enforced. Recalculate the 2% and 6% at the beginning of every month and trade accordingly.

While traders should always note that Forex trading involves a substantial risk of loss, these two rules can help you save your precious money during bad times, while you hopefully grow your money during good times. The 2% and 6% rule can help cut the losses short.

Apply this money management to your trading today, get disciplined and become professional trader.

TIP:

Make sure a trade cannot lose more than the 2% and overally all trades cannot lose more than the 6%. Any time drawdown of the month exceeds the 6%, stop trading until next month. Calculate the 2% and 6% of account equity once and only at the start of every month

Becoming A Successful Day Trader

By Tony Jacowski
Published: November 26, 2007

There are two types of day traders – scalper and momentum traders. The scalper buys and trades stocks within minutes, whereas a momentum trader buy stocks that fluctuate from high to low during the day. But at the end of the day, the ultimate goal of a day trader is to buy stocks and sell them at the highest possible value.

A trader should be knowledgeable in paper trading and risk management. Traders keep themselves updated by reading stock exchange periodicals. It is essential for a day trader to absorb the relevant information completely and regularly. New York Stock Exchange and the National Association of Security Dealers impose minimum margin requirements for day traders.

A day trader’s world is full of risk, where fortunes can change by the minute, depending on unpredictable market swings. Besides luck, the profit of a day trader depends upon how vigilant and fast they are. The trader’s analytical, as well as risk management skills also determines success. The element of unpredictability is evident in every aspect of their work, ranging from holding positions on long trades that involve purchasing the stocks at a low rate and selling it later at a higher rate, to short selling that involves the reverse of long trades. This involves selling the stock at high rates in anticipation to compensate it when the prices fall, to speculating without being bothered with the fundamentals and technical aspects of the trade.

Characteristics Of A Day Trader

• Believe in their efforts and do not pay heed to rumors.

• They have a sharp analytical ability.

• They are strong-headed people, who are not affected by the prevalent market trends.

• They employ a mathematical approach.

• They work towards understanding the latest regulations related to trading fees and taxes.

• Day traders are not affected by the fluctuation of financial indicators such as NASDAQ and DOW JONES.

Anyone can become a day trader by opening a trading account with a brokerage company or a stock exchange or bank, provided it allows trading. You need to fulfill certain legal and commercial formalities, before initiating trades. You can become a day trader in any one of the following categories:

• Stock, bonds and securities.

• Foreign Exchange Currency

• Commodities – such as metals and food grains.

In order to be a successful day trader you need to be very cautious about every step you take, since a single mistake can turn successes into failures. You need to respond to liquidity and volatility quickly. Though day trading is a lucrative career, you need to keep in mind that you do not become an experienced day trader overnight. It requires time and rigorous practice. If you want to pursue day trading as a career, then you need to practice on a trading website to gain confidence in the application of new techniques and implement them in your career.

Tony Jacowski is a quality analyst for The MBA Journal. Aveta Solutions – Six Sigma Online ( http://www.sixsigmaonline.org ) offers online six sigma training and certification classes for lean six sigma, black belts, green belts, and yellow belts

GDP (Gross Domestic Product)

A country’s GDP (Gross Domestic Product) is one way of measuring the size of a nation’s economy. The GDP is the market value of all completed goods and services made by a nation over a set time period. The most common method of working out a nation’s GDP is by using this formula:

GDP = government spending + consumption + investment + (exports ? imports)

To see a list of countries and their GDP you have visit the GDP List

The GDP numbers have a big effect on the currency markets, infact it can be one of the biggest market moving reports. The GDP is taken into consideration by central banks when they make interest rate decisions. Higher than expected numbers can often improve a case for a rate hike and therefore increase the demand for the nation’s currency, the reverse is also true.

FOMC (Federal Reserve Open Market Committee)

The branch of the Federal Reserve Board that determines the monetary policies. Like the Bank of England, the FOMC is made of of a board of governers, currently there are seven members.The FOMC meets eight times per year to set the fed funds rate, the discount rate. They also control the money money supply by buying and selling government securities. There is always speculation in the Currency Markets about what will occur in respect of interest rates prior to the news being released. The market will usually price in these expectations before the event, so if the news from the FOMC is inline with what is already priced in, the market may not move massively. It is often the case that a big deviation from what I widely expected (for example A shock rate hike) could move the market more, but not always.

CPI (Consumer Price Index)

CPI (Consumer Price Index)

Inflation, the tendency of prices to rise and keep on rising is measured in many countries by the the Consumer Prices Index (CPI). This official measure is calculated each month by taking a sample of goods and services that a typical household might buy, including food, heating, household goods, travel costs. The biggest tool government’s and central bank’s use to control inflation is interest rates. Different central banks have different inflation targets. If inflation is rising above these targets, it often suggests an interest rate hike is more likely. Interest rates are often the central banks and governments biggest tool in controlling inflation. Traders usually increase or decrease bets on rate movements accordingly. If the numbers deviate widely from expectations, the release can provide some big movements.