Margins and Leverages... A perception that a company offering a high leverage is good for the investor, is wrong.. Its a double-sided SWORD !!

Margins and Leverages

In forex markets huge profits can be earned in a single week, maybe a single day or even in an hour. The forex market allows you to use one very special feature that is not as common in the stock market: leverage. The leverage of the forex market is not as simple as 1:2 leverage, but 1:100, and sometimes even 1:500. This means that for every dollar you have in your account, you can trade one hundred dollars and profit from those hundred dollars.

Leverage can prove to be helpful when your strategy is right and the trade is going in your favour. In view of the fact that the leverage makes the transaction volume a hundred times bigger, your profits are also a hundred times bigger. This means if the currency pair moves 1% in your favour, you made a profit of 100%, or your account is doubled. If the currency pair moved 3%, your multiplied the investment by four. With higher leverages, even a change of 0.5% can make your account four times.

Like every coin has two sides Leverage also has the other side. The last paragraph talked about the profits but there was a condition “if your strategy is right”. Now imagine if the strategy goes wrong (the chances are very fair) and the market turns against you. Just as your profits, your losses are also multiplied by the leverage. If a trade is going 0.2% against you, you are losing 20% and if the pair you are trading goes 1% against you, your entire investment is gone. If you invested all your money in that transaction, your broker will give you a margin call and you will need to fund your account again.

Many investors get attracted to brokers who use this great tool to lure traders and make huge profits. Leverage is a kind of loan, so the broker is earning interest on the money it lends you for leverage. Also, brokers use leverage to attract traders, but they hide the risks behind shiny presentation of profits. Honest brokers mention that leveraging your positions can bring big losses with them as well as huge profits. Handling leverage is very easy, and should be exercised by any trader. When opening a trade, make sure to select the proper amount of leverage. Most good trading systems automatically adjust the leverage for optimal results and minimal risks. This way you can enjoy both worlds - profit from leverage, but not be harmed too much from leveraging a losing trade. I trade with 1:100 leverage. To trade safely with leverage, get yourself an honest forex broker and a good forex trading system.

Here are 7 tips that I found on the internet to achieve success with forex trading: (very relevant)

1. Do not trade without stop loss point.

2. Do not focus too hard on achieving a certain target. Nobody knows which way the price is going.

3. Always use 3% of money management at most.

4. Try one strategy at a time and strict to that rule for at least 6 months. If you are really strict to the rule and the number of win is less than the number of loss, don’t use that strategy anymore.

5. Do not trade on news. It’s really unpredictable.

6. Do not quit after a few losses or a low profit margin.

7. Don’t trade when you are not in a good condition. Your physical, mental and emotional state will have a direct impact on your Forex trading result.

The last tip has a significant influence on forex trading leverage but is frequently overlooked and underestimated.

!!! NFP !!!

“Trading is hard work, laborious and boring, just like any other jobs. If you are excited about it, you are gambling”

NFP

As all of you know , the importance of NFP news which makes the trading very volatile, here is some points about NFP which I learned during my experience in Forex Trading. I hope it would be useful for all of you.

• New traders – stay away: Trading during this volatile period is very risky. Take a break and enjoy the weekend.
• Action before the release: Strange moves begin in the markets well before the release at 13:30 GMT. This usually reflects the expectations – expectations which aren’t necessarily met, and they can lead to a counter reaction afterwards. Jittery trading intensifies with the release of the Canadian employment figures, an hour and a half before the American ones.
• Friday effect: Strong moves in a certain direction – either dollar strength or dollar weakness can be seen hours after the release, usually in the last hour of the London session – between 16:00 to 17:00 GMT. This is the move that will determine the close of the week, and thus have a real long term effect. This is the full reaction.
• Technical barriers can be broken – support and resistance lines, uptrend support or downtrend resistance lines can be breached around the release of the NFP. This is usually only temporary – the graph returns to normal after a while, and these lines are respected again.
• Initial reaction is wrong: the initial reaction to the release is in the wrong direction: the knee jerk reaction is usually “normal”: good data yields dollar strength and bad data yields dollar weakness. This is very temporary! We are still in the global crisis, and the risk factor rules. So, minutes after the “normal” reaction, the risk factor kicks in and eventually the opposite happens: good data yields dollar weakness (risk appetite), while bad data yields dollar strength (risk aversion).

*!!! Is Forex Trading a Gamble??? !!!*

"He that can have patience can have what he will. — Benjamin Franklin"

People often ask me, or to be more specific argue with me, that TRADING is GAMBLING. I say a big “NO”. It is indeed a highly debatable topic. I just want to put my views forward on it.

Is Forex Trading a Gamble?

FOREX

That’s what everyone thinks at first but it really isn’t. Forex Trading will become gambling when there is no fundamental or technical reason supporting a trading decision. Let me explain…

GAMBLING

- To bet on an uncertain outcome.

- To play a game of chance for stakes.

SPECULATING

- To engage in any business transaction involving considerable risk or the chance of large gains, esp. to buy and sell commodities, stocks, etc., in the expectation of a quick or very large profit.

I think it’s all about Speculation. The trader takes on risk in a market for a potential reward. The gambler risks a $5.00 chip on the black jack table to try to make $10.00. Pepsi pays for commercial television time at a network (risk) hoping to see a return (reward) on that investment much greater than the cost of the commercial. The retail store owner buys inventory (risk) in hopes of selling that inventory to you and me at a much higher price (reward).

I think you get the point. If you think of it this way, the real question becomes, "What type of speculator are you?"

Are you the type who only takes on risk when the odds are stacked in your favor or the type who takes on risk when the opportunity "feels right" and "looks good"?

My answer to a friend of mine was very simple, I said, "People think Trading and gambling are very similar but there is one very big difference. Trading is what you see, Not what you think. And gambling is just the opposite.

Then, I relayed a scenario for him, "Imagine someone is playing Poker and he bets money on the table after he has a very fair idea of what the 5 cards to be opened will be. If he/she does place a bet, then also they can take all their money off the table at any point of time That’s trading!" Gambling can mean a lot of things. Trading Forex really depends on your competence and intention. If you don’t know what you are doing and want to make quick and easy money that is gambling. If you are very competent and want to make money in the Forex market, that is speculating. Speculating in the Forex market and holding on to your loss making position is Investing (LONG term).

“If you don’t know what you are doing, doing nothing is better than doing what you know”

Many other differences exist between the casino/gambling industry and the Forex market. These are just some examples. If you have more, or disagree with one of the above points, feel free to speak your mind in the comments.

The news was negative for the US! Why did the USD strengthen?

"For being a good Trader: Work like a dog. Eat like a horse. Think like a fox. And play like a rabbit."

“The news was negative for the US! Why did the USD strengthen? "

I feel sad when I see this, because after all, in the Forex Market it is very difficult to make money and very easy to lose. (I have lost money during such news)

To explain the above in simple terms, Here is one of the theories which I believe work well during such news.

In all markets, SENTIMENTS are the reason behind all movements. (That is why candlestick chart pattern is my best tool to analyze the market)

You feel that currency A will go bullish, you buy.

You feel that currency B will go bearish, you sell.

Prior to the current crisis, say before 2008, markets were doing well in Properties, equities, business…..

Everyone was ready to take risk and investments were made all over the world. Everyone was a risk seeker but in mid 2008 when the crisis started everyone was risk aversive that is why equities, EUR, GBP, CHF, properties etc were following an uptrend and dollar index was following downtrend. You can simply apply the Demand- Supply rule

USD >>>>> Foreign Exchange >>>>> Equities,EUR,GBP,CHF,Properties

By the above flow it is very clear why the value of USD was going down prior to the crisis.

But after mid July 2008 ( when current crisis began )

People thought:

"Hmm, the market is collapsing. My money is in danger? I better shift my funds out and park them in safe assets in the meanwhile"

And what are the safe haven for investor during the crisis.

• Gold
• US government treasury bonds (The US government won't go bankrupt right?)

The above diagram reversed in this condition and looks like….

Equities, EUR, GBP, CHF,Properties >>>> Foreign Exchange >>>> USD >>>>> Gold, US government bonds, T-bonds….

So by the demand-supply rule, value of USD began to rise.

So I think now confusion about relationship between USD and stock market index would be clear upto some extent, but regarding FOREX trading keep one thing in mind “Always try to understand sentiments of the market”

I think now you will not complain market, if negative news about USD gives strength USD. Folks, I wish to say that forex trading is not an easy "game". You have to employ proper money management and catch up with developments in the world.