Forex Guide
Positions in Forex
Forex is a market where currency is a bought and sold everyday. Trading of more
than 1.5 trillion US Dollars everyday makes Foreign Exchange one of the largest
financial markets in the world. The main aim for everyone trading Forex is to
make profit from their position.
Now, the most important question here is that, what is a position?
A Position can be defined as the netted total holdings of a given currency. A
position can also be termed as a trading view expressed through the pattern of
buying or selling. It can denote the size of a currency either being possessed
or payable by a trader. A position can be categorized into 3 types:
Flat or Square trade or position has no exposure in the market.
Short trade or position is where more currency is sold than being bought.
Long trade or position is the one where more currency is bought than being sold.
Open trade or position is the one where an investor has either bought or sold a
currency but is yet to sell or buy back the corresponding amount to successfully
close the position.
Currencies are always valued in pairs in a Foreign Exchange market. That is the
reason why all trades bring about an instantaneous or real time buying and
selling of currencies, where one currency is bought as the other is being sold.
This is the main reason why Forex is known as Foreign Exchange or a Crossing
Currencies market. The main aim of all the traders while trading Forex is to
exchange one currency with another, with the anticipation and probability that
the market prices will change. And if that happens, then the currency you bought
has the chances to increase its price as compared to the currency that you sold.
If the currency that you buy increases in its value as compared to the value on
which you bought it, then you must instantly sell it back to gain the profits
and secure them.
Other terms such as “Going Long” and “Going Short” in a market are also
frequently used. “Going Long” is used when you are buying a currency and are
therefore, said to be “long” in that currency.
Similarly, when you are selling a currency, you are said to be “Going Short” in
that currency.
Because the Forex market goes by the exchange system, traders can be seen buying
and selling currencies simultaneously, hence “Going Long” in one currency and
“Going Short” in the other.
An Open position is one which is current and ongoing. Here, the trade is still
going on. In order to Close a position, a trader has to conduct an equal
exchange deal with the same currency pair.
If a currency is bought by you, which has suddenly appreciated in its value,
then have the chances of making profits making the deal and by closing your
position. This means that you will have to sell that particular currency, just
to buy the counter in the pair.
Benefits of SPOT
SPOT or Single Payment Options Trading is one of the two options available to
Forex traders for trading purposes, the other one being the “Traditional”
option.
SPOT can be known as more of a trader oriented option, where in he predicts what
he feels with be the movement in the market on a particular day or date. And if
the trader is successful in predicting it correctly, then the potential profit
to be earned can be very high. And if what the trader has predicted goes wrong,
and the SPOT option is not the right hit, the trader will not be suffering a
huge loss for it. Only the premium given to him by the broker is lost.
For example, if a trader predicts a scenario where the market with EUR/USD will
break 1.5000 in 15 days, he will then attain a premium quote. And in case the
predicted scenario actually occurs in the market, then the trader will receive a
payout with the premium quote.
Moreover, SPOT options are much easier to trade. It’s all about having thorough
knowledge about the market and its trends, because that is the only way by which
a trader can be able to predict correctly, the movement of the market.
And if you are accurate, you can receive instant profit which will be
transferred directly to your account. And if you are wrong, the only loss that
you’ll have to bear is the loss of the premium that you were paid by the broker.
Another great benefit of SPOT options is that it presents its traders with a
vast choice of unique scenarios to choose from, enabling the trader to select
precisely what he/she believes might happen in the market.
SPOT options allow its traders with many choices, such as Standard options like:
Digital SPOT
This option allows you to receive a payout in case the currency price is goes
above or below a certain level.
One-touch SPOT
This option allows you to receive a payout once the currency price reaches a
certain level.
Double one-touch SPOT
This option allows you to receive a payout in the situations when the price
reaches either of the two set levels.
No-touch SPOT
This option allows you to receive a payout in the situations when the price does
not reach a certain level.
Double no-touch SPOT
This option allows you to receive a payout in case the currency price does not
reach either of the two set levels.
Investing Blunders made in Forex
Whenever you decide to step into the Forex market by investing into this trading
business, you should prepare yourself for entering into the market, somewhat
blind.
This because you or anyone else, who is just stepping in, can not entirely know
what position of the investing trend is currently going on, in which you are
entering at.
Or, you might invest in the Forex market just before the market trend changes.
Smart and planned investments are the ones which protect your trading flow and
help you put up a stop loss order on all your trades. And yes, this exit point
of your trade has to be decided beforehand, that is before you enter the trade.
Once in the market or trade, you won’t have much time to think and last minute
uncertainty can give room to blunders.
A stop loss order can plainly be defined as a trade exit point decided
beforehand, which helps a trader in keeping a track of the right point at which
to exit the position he is trading at.
A predefined exit point shields your investing plan for trading purposes by
cutting your losses, and also guards against all your emotional or gut feelings
which might tell you that you may get lucky with this deal or that.
Hence making you go ahead and bet in a deal without thinking much about your
position and whether you will be able to bear its results if the market moves
against you.
Another important fact about the history of investment blunders is that all the
giant investing losses had once begun as a series of small losses. And this is
exactly the reason why predefining a stop-loss order is so vital before you
begin with a trade.
There is however a very common doubt which seems to be appearing in every
trader’s mind while deciding the stop-loss order, “How wide should I set my
stop?”
And although there are no standard answers to this doubt, it can still be
cleared with some help.
Firstly, the width of your stop-loss order totally depends on the time frame for
which you are planning to invest.
If investing short-term, you will have to set a stop loss order which is closely
set to the currency price. But if you are investing long-term, you will have to
give your currency price some more room to shift or move about and therefore,
set your stop-loss order a little lesser.
Secondly, once it is clear to you what time structure you will be trading for,
you are now required to eradicate the typical market disturbance in terms of
instability, in that specific time structure.
Setting very tight or limited stop-loss orders can have some serious drawbacks
to it, some of which are as follows:
• Firstly, setting tight stop-loss orders will actually minimize the consistency
of your trading system because due to a tight order, you will get stopped out of
the trade a little too often.
• Secondly, since your trading transaction costs add up for a key share of your
company expenses, you considerably amplify your transaction costs
Therefore, it is always advisable for the Forex traders to develop a trading
system that is operational for a somewhat extended time structure.
With a smart and planned trading system employed, stop-loss limit set to
minimize investing risk, and a well structured money management strategy in
place, any trader can be well positioned to get the most out of their market
trading and profits.
Are you an “obsessed to win” trader?
Traders of all kinds have always been attracted towards Forex trading with the
basic motive to make profits, and to win as much as they can. The thrill to
enter the market, the adventure to bid the money, and the attempt to predict the
unpredictable drives investors to this largest Foreign Exchange market in the
world.
But what we as traders do not realize is that unknowingly, our emotions can make
us trade incorrectly.
There is no doubt that entering Forex market can open a lot many avenues for you
as a trader to explore large money making prospects easily accessible with the
Forex trading these days. People from various genres, class and gender enter the
Forex world on a daily basis, just for the hope of winning it all and
experiencing the great style and life of a money-making Forex trader.
But, while get easily floored by the profits and winnings of a successful Forex
trader, what is easily forgotten is the fact that while there are quiet a few
traders who are winning at the Forex market one day, they can always be the ones
who can lose all their winnings the very next day!
What needs to be understood is that Forex trading market is just like a war
front, where you have every possibility to lose the battle as much as you have
to win it. It is a war where you can easily lose all your capital and confidence
if you do not act sensibly in your wars in opposition to the Forex market
Forex market can often act as a clever, frightening and a somewhat wicked enemy
at times too. This is exactly why every move in the Forex trading market should
be a planned and organized move. You, as a trader should never be unprepared
when inside the trading system once. With such a volatile market as the Forex,
anything can happen anytime. In the world of Forex market, the first thing that
can go against you while trading is your over confidence to win.
An obsession to win for a trader, can become a benefit for the market, making it
easier for your enemy to defeat you, as you become overpowered by your emotions.
A lot many traders and investors believe in the strategy of never to close a
trade until or unless it is turning into a profitable one. An approach which can
surely lead them to a series of losses. Also, many investors think that the
assumptions and predictions they have made on a particular trade, based on some
trading indicator and industrial analysis will always churn out accurate and
right results for them.
Believing that the Forex market will begin performing in the exact same way in
which they had predicted, even if the trading graphs and charts clearly indicate
the opposite, is foolishness. An attempt which can make traders lose all their
money on false anticipations. No wise Forex trader will trade with such
illusions in his mind. In reality, the market can any moment, move against or
with you. Such a behavior while trading will only lead you to continuously
pouring in your money into losses, which will obviously be market’s gains.
You will be easily defeated by your own obsession of wining which will at the
end of the day, turn into a loss for you instead of being profitable.
So, always keep in mind never to be obsessed with emotions and trade Forex.
Essentials in Forex
There are quite a few basic essentials which a trader should learn well, when it
comes to trading Forex. These are some of the tools that the trader will need at
various stages of Forex trading.
Evaluating Profit and Loss
If you are trading through an efficient online trading platform, it is likely
that you will be provided with an automated calculation of your Profit and Loss
vis-à-vis your open positions in the Forex market. This facilitates the trader,
making it easier for him to keep track of his position and movement in the
market automatically.
Nevertheless, it is still helpful for every Forex trader to know and comprehend
the calculation through which, these results are derived.
Knowing all about Margins
Advantages are many, when it comes to getting good margins for trading. Margin
can be known as the minimum amount required to be deposited before an investor
starts trading. This can also be known as the initial amount with which the
Forex trading account can be opened.
With bigger margins, you can get more buying power in your hands. For example,
if you have $5,000 worth money in your margin account which also provides 100:1
leverage, then you can easily buy about $500,000 of exchange.
This is for the reason that you only have to position 1% of the buying price as
security in your account. Thus, in other words, you have a $500,000 worth of
buying power in your hands.
This is exactly why trading exchange with a margin account facilitates you to
raise your buying power. Margin accounts can also allow you to enhance your
overall return on investment with less capital pay out.
But what needs to be kept in mind always is that, while trading on margins can
increase your profits, there is an equal and opposite possibility that it can
amplify your losses as well.
Making use of a Margin account for Forex trading can definitely turn out to be a
profitable investment strategy, but only if you manage your account wisely.
Along with the profits, what also should be considered seriously are the risks
which are involved by getting more buying power with lesser cash outlay, as this
may also lead you to lose more than you have at times too.
Also, always make sure that you thoroughly read the margin agreement which
occurs between your payment firm and you. Talk to your account representative if
you have any questions.
In the cases where the margin available in your account drops below a preset
boundary, there are 99% chances of your account positions being partly or
completely shut down.
Also, there is a possibility that you might not even get a margin call before
closing down your positions.
To avoid such a risky situation, it is always advisable that you supervise your
margin account stability regularly to keep a check that your money does not
stoop as low as the margin set.
Also, make appropriate use of correct stop-loss orders along with every open
position. Setting a stop-loss order will help you limit your risks and fix a
safe point for exiting the market.
Price chart patterns
There are a range of charts available, which can help you study the Forex market
patters and price actions. Although many types of chart forms are used to
represent the market movements, the Bar charts are the most commonly used charts
to describe the patters simply and clearly.
In these Bar charts, each bar or slab usually signifies a period of time ranging
from a minute to a number of years. The significance of these charts is that
they show diverse price patterns that have been established so far.
Some other types of price chart patterns are:
Point and figure patterns
The point that differentiates the Bar chart patterns from the Point and figure
patterns is that, the latter does not employ time scales to specify a specific
day or month related with a particular price action.
Yet, they are basically the similar to the patterns created through the Bar
charts.
Candlestick patterns
Candlestick patterns are also employed to forecast the market, just like the
Point and figure patterns and Bar charts patterns. But Candlestick patterns are
more visually appealing, detailed and clearer than the other patterns, because
of their tinted bodies.
Types of Forex Analysis
There are two types of analysis which are generally used by the Forex traders to
keep a track of the Exchange market. These are:
• Fundamental Analysis
• Technical Analysis
Fundamental analysis includes a detailed study of the basic and primary elements
which have and can potentially manipulate the financial system of a certain
thing. This type of technique is often used to study and forecast the various
trends like price action and market trends. These predictions are done mainly
through evaluating fiscal indicators, public factors within a company and
administration policies.
When it comes to financial markets, fundamentals are the key. Fundamentalists
can easily tell you how did any particular market trends occur and what will
they be at the current hour or minute and further significantly, at what time
and at which price will they be in the near future.
Market traders are divided into the two; they are either Fundamentalists, or
Technicians. But the fact is that it is kind of difficult to survive in the
Forex market with one of the two techniques. What is needed is the right blend
of the two to form a perfect picture of the current market and price trends.
A Forex trader should always be aware of the fact that any financial market is
influenced by many factors apart from its past trends and movements. Many issues
such as political and financial pressures, national issues and social order
define to a great extent, the way most of the financial markets move.
While Fundamental analysis is a very successful technique to predict monetary
conditions of the market, it can somewhat lack in determining the exact market
rates and prices. For example, just by studying a financial forecast of the
political and fiscal reports, it cannot be guaranteed that you will be
benefiting from them. What is important is to know the right and accurate way to
utilize the information by setting up accurate entry and exit points for a
particular trading position.
Fundamental analysis is mostly studied using a multitude of empirical data to
devise a strategy with an effort to predict the current market movement as well
as future prices.
Technical analysts are of the opinion that factors like market fundamentals,
hopes and fears of the people need not be studied in detail to understand the
market well.
According to them, market moves in a rather predictable manner and these moves
can be predicted by studying various past patterns and trends. Technicians
believe that markets move in trends and that history repast itself. And
therefore, they are not as unpredictable as they seem.
Technical analysts use systematic methods to predict market movements such as
price charts, volume charts, and other studies to estimate future market values.
After doing so mush of analysis of the past trends and flows, it becomes very
difficult for the technical analysts to not rely on their findings a 100%. After
using technical analysis to foresee the market trends, it is necessary for the
traders to set up strict entry and exit levels, and stay with their pre planned
strategies rather than deviating from it at the last moment.
What moves the currency rates?
A lot of reasons can have their hands behind the fluctuating market and currency
rates, and not one or two can be blamed for any sort of rise or fall in them.
Although it would not be entirely wrong to say that the Forex market business is
more or less based on these fluctuations only. Traders trade in this market,
purchase and sell various currencies with the expectation of making gains if the
value of the exchange moves in their favor. Now this sudden movement in the
market can be caused by either market news or current events all over the world,
which have an effect on the demand and supply of these currencies.
This law of demand and supply is what works well in this Forex market too. When
the demand of a particular currency goes up, its market price also escalates as
compared to the other currencies in the market.
Similarly, if the demand of a particular currency goes down, traders are no
longer interested in holding it back with them, and so the market price of the
currency also decreases.
Economic development
It is quiet obvious that the traders trading in currencies and interested in
exchange markets, will be equally keen and interested in knowing about the
overall economic development of the countries whose currencies they hold, or are
interested in buying. Every trader wants to be convinced that they economy they
are about to invest in is developing with a solid and steady growth, which can
be known by studying various factors such as unemployment, import and export,
and the GDP statistics of a particular country.
Rise in Unemployment experienced by any particular country is considered as a
negative factor, whereas a fall in Unemployment is always measured as a positive
aspect.
Similarly, an increase in the GDP figures of a particular country is considered
as a positive feature, whereas a decrease in GDP figures is always measured as a
negative aspect.
Also, a mount in the Exports numbers of a particular country are always
considered as a positive trait as compared to the decrease in Exports numbers
which is looked upon as a negative aspect.
Political strength
Lots of factors are responsible for determining the political stability of a
particular country. These factors can be any kinds of alterations in government
or by the government, rising unemployment rates, elections or international and
political conflicts.
Every investor is cautious enough and considers all these factors in his mind
before going in for investing in a particular economy.
Any kind of Political conflicts, natural calamity or terrorism attacks or wars
are major contributors in making or marring the economy of a country.
Interest Rates
Around the world, interest rates are always followed by money. If the interest
rates of a particular country rise up, investors big and small from all over the
world would want to invest their money with it in order to gain higher returns
on their investments.
Mostly it can be said that if you want to capitalize on higher investments, then
you have to keep an eye on the rise and fall of the interest rates in a
particular country. And the factors which will help you determine this rise and
fall are mostly the financial rise indicators in addition to the speeches of the
current leading, dominating and significant figures like big politicians, iron
and steel magnets and businessmen.
The interest rate movements generally take place during the programmed meetings
by the central banks like BOE, FED, ECB, and BOJ.
An increase in the Interest Rates is always considered as a positive factor for
a particular country as compared to the decreased in Interest Rates.
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