Forex Leverage

What is Leverage in Forex Trading?
Forex traders conduct trades in one of three types of Forex trading accounts – a standard account, a mini account, or a micro account. A micro account allows the Forex trader to trade in the smallest of lot sizes, generally 1000 units of the base currency. The next step up is the mini account, which allows trades in lot sizes of 10,000 units of the base currency. The standard Forex account allows trades in 100,000 units of the base currency, and is the level at which you’ll find all professional Forex traders.

The nice thing about having three levels of investment minimums is that it allows new Forex investors to get their foot in the door without having large amounts of investment capital before they can get started. Micro accounts allow traders to deposit as little as $250, and due to the power of leverage, lets the Forex trader control sums of currency many times larger than their investment capital.

Although Forex leverage provides investors with a method of generating healthy profits it can also be responsible for the new Forex investor losing his or her capital very quickly. The primary reason new Forex traders fail is that they’re undercapitalized for the type of account they’ve opened. Professional traders understand this, and this is why they make sure they have far more investment capital to deposit in their Forex account than the required minimum.

Leverage’s constant companion is the margin. Margin basically describes the amount of money in your account that you can use to conduct trades. The amount of usable margin you have to play with is dictated by the amount of equity you have in your account: take the equity in your account and subtract the amount of margin that you’ve used and you’ve got your usable margin.

If the equity in your account ever drops below the amount of used margin then a margin call is generated. A margin call is when the broker cashes in enough of your position to cover the drop in equity. As an example imagine that you have $10,000 in your account, giving you $10,000 in usable margin. You buy $7000 worth of lots, giving you $3000 remaining in usable margin. If the value of your investment drops just a few pips (which can easily occur in a matter of hours or minutes in some cases) your equity can drop from $10,000 to $7000 quite quickly. At this point the margin call is triggered and you lose $3000 to cover your margin. Before you know what has happened you’ve lost 30% of your investment capital.

The power of Forex leverage can be seen in the above example. The ability to control $100,000 worth of currency with $1000 can catapult the savvy Forex investor into the next tax bracket, but only if they manage their margins wisely.

The Forex market can be a very volatile place, and those that don’t understand the concept of margins will quickly fall victim to it. Those that understand this reality are far better equipped to succeed in the Forex market than those who jump in unprepared.




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Forex Online Trading Software

Almost every online Forex broker has a software package for their clients to make transactions and get information about market prices. Due to the relative maturity of online trading there is a consensus among Forex brokers about what clients need in terms of software tools. There are two main classes of Forex software – web based and client based.

All Forex trading software needs to provide up-to-the-second market information. The fast moving pace of the Forex demands real-time data delivery for making decisions about when to enter and exit the market. Forex dealers claim their software performs well with a minimum of delay, but in fact there can be a number of factors that could delay data transmission.

Internet connection speed and distance from the broker's servers are the two main factors that can slow down data transmission. Forex traders should have a reasonably modern computer and a high speed Internet connection to take full advantage of the Forex software offered by their broker. It may also pay to choose a broker in the same area as you live. Traders in Bangkok who deal with brokers in Ohio may experience delays – especially during volatile market conditions.

Web Based or Client Based?

Web based Forex trading software is on the broker's website – you don't have to install any software on your computer. Client based software requires you to download and install the software package used by your broker. Which is better? More and more brokers are offering web based client software for reasons of convenience, safety and reliability. Web based software allows you to log on to your account from any computer – you can make trades from any location that has an Internet connection. Client based software, on the other hand, restricts you to making trades from just one computer.

Besides the convenience, web based software offers greater security. Data is secured with high-strength encryption making it impossible for outside parties to access during transmission. Client based software is also secured during transmission but there are more possibilities for data loss from the trader's computer. Viruses and hackers may be able to access valuable financial data stored in a home or office computer.

Forex Trading Software Features
Forex software needs to access real-time quotes and offer a means to enter and exit the market. Even the most basic packages offer these functions. Current quotes can be seen for most currency pairs and the software allows you to buy or sell at market prices or enter and exit the market using stops or limits. Ideally, trading software should have integrated charting functions with a variety of viewing functions.

Basic Forex software packages should be offered free of charge, but many brokers also have more advanced packages available for a monthly fee. Some of the features you could expect to see in advanced software include the ability to trade directly from the chart and full analytical functions.

Forex Software Technology
The backbone of Forex trading software Technology is a series of data servers that allow you to connect to your broker's web site and make transactions. Servers operated by the Forex broker need to be reliable and secure for maintaining data integrity and assuring accurate transaction processing. Servers are subject to power outages and natural disasters, so to ensure maximum uptime, the broker should operate at least two sets of servers in separate locations. Brokers should also offer regular data backups to guarantee the integrity of their customer's financial data in case of server failure.




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How to read Forex Quotes

Currency prices are determined by a number of factors, the most important of which are economic and political conditions in the issuing country. Political stability, inflation, and interest rates are all factored into the price of any currency. In addition, governments can try to control the price of their currency by either flooding the market (to lower the price) or buying extensively (to raise the price).

Because of the immense volume of Forex, however, it is impossible for one force to control the market for any length of time. Market forces will prevail in the long run, making FOREX one of the most open and fair investment opportunities available.

Each world currency is given a three letter code which is used in Forex quotes. The most common currencies are USD (US dollars), EUR (European euros), GBP (United Kingdom pounds), AUD (Australian dollars), JPY (Japanese yen), CHF (Swiss francs) and CAD (Canadian dollars).

Prices of foreign exchange are indicated by FOREX quotes in pairs of currencies. The first currency is the 'base' and the second is the 'quote' currency. In this example:

USD/EUR = 0.8419

...the currency pair is US dollars and European euros. The base currency (USD) is always at '1' and the quote currency shows how much it costs to buy one unit of the base currency. In this example, 1 US dollar costs 0.8419 euros.

Conversely...

EUR/USD = 1.1882

...tells us that it costs 1.1882 US dollars to buy 1 euro.

When the price of the quote currency goes up it indicates that the base currency is becoming stronger – one unit of the base currency will buy more of the quote currency. If the quote currency falls, however, the base currency is becoming weaker.

Forex quotes are seen in 'bid' and 'ask' prices. Bid is the price that buyers will pay for the base currency (while selling the quote currency), and ask is the price that sellers will sell the base currency (while buying the quote currency).

Symbol Bid Ask
USD/CAD 1.2392 1.2397

This chart tells us that we can buy one American dollar for 1.2397 Canadian dollars, or sell one American dollar for 1.2392 Canadian dollars. The most commonly traded currencies pairs are the 'Majors' – GBP/USD, EUR/USD, AUD/USD, USD/JPY, USD/CHF, and USD/CAD.

We often see exchange rates listed in cross currency charts that list many different currencies and their values against each other. An example of such a chart is seen here:

US $ Ca $ Euro UK £
US $ 1.00000 1.24060 0.83935 0.56870
Ca $ 0.80606 1.00000 0.67657 0.45841
Euro 1.19140 1.47805 1.00000 0.67755
UK £ 1.75840 2.18147 1.47591 1.00000

In this chart, the currencies listed down the left side of the chart are the base currencies and the currencies at the top are the quote currencies. We can convert the chart above into currency pairs by following the row beside the base currency. Using US dollars as the base currency we get the following currency pairs:

USD/CAD = 1.24060
USD/EUR = 0.83935
USD/GBP = 0.56870

...which tells us that one US dollar is equal to the corresponding value of the quote currency. To find the opposite pair e.g. CAD/USD follow the Canadian dollar row to the US dollar column - CAD/USD = 0.80606 (one Canadian dollar is worth 0.80606 US dollars).

There is no standard for cross-currency charts – some have the base currency on the top and some have it on the side. How to tell which is which? You need to know at least one pair of currencies and which one of the pair is more valuable.




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How to Get Started In Forex Trading

You may have heard about the foreign exchange market (Forex) and the investment advantages it offers. You would like to try it out, but don't know where to start. This short guide will give you the basics in Forex and tell you what you need to participate in this fast growing field.

Foreign exchange used to be limited to large players such as national banks and multi-national corporations. In the 1980's the rules were revised to allow smaller investors to participate using margin accounts. Margin accounts are the reason why Forex trading has become so popular. With a 100:1 margin account, you can control $100,000 with a $1,000 investment.

Forex is not simple, however, and education is needed to make wise investment decisions. Although it is relatively easy to start trading on the Forex, there are risks involved, so finding out as much as possible about the market is a good move for any beginner.

Forex traders usually require a broker to handle transactions. Most brokers are reputable and are associated with large financial institutions such as banks. A reputable broker will be registered as a Futures Commission Merchant (FCM) with the Commodity Futures Trading Commission (CFTC) as protection against fraud and abusive trade practices.

Opening a Forex trading account is as simple as filling out a form and providing the necessary ID. The form will include a margin agreement that states that the broker can interfere with any trade it deems to be too risky. This is to protect the interests of the broker – most trades, after all, are done using the broker's money. Once your account has been established, you can fund it and begin trading.

Many brokers have different types of accounts to suit the needs of individual investors. Mini accounts allow you to get involved in Forex trading for as little as $250, while standard accounts may have a minimum deposit of $1000 to $2500 depending on the broker. The amount of leverage – using borrowed money – varies with accounts. High leverage gives you more money to trade for a given investment.

However – Forex beginner traders are advised get accustomed to Forex by doing paper trades for a period of time. Paper trades are practice transactions that don't involve real capital. They allow you to see how the system works while learning how to use the various software tools that are at provided by most Forex brokers.

Most online brokers have demo accounts that allow you to make free paper trades for up to 30 days. Every new Forex investor is strongly advised to use these demo accounts at least until they are showing consistently steady profits.

Each broker has their own set of software tools to aid in making transactions, but there are a few tools that are common to all Forex brokers. Real time quotes, news feeds, technical analyses and charts, and profit and loss analyses are some of the features you should expect to see on most online brokers' web sites.

Almost every broker operates on the Internet. To access their online services you should have a reasonably modern computer, a fast Internet connection, and an up-to-date operating system such as Windows XP. Once your account is set up, you can access it from any computer – just enter your account name and password. If for some reason you are not able get access to a computer, most brokers will allow you to make trades over the phone.

Trades are commission free, meaning that you can make many trades in one day without worrying about incurring high brokerage fees. Brokers make their money on the 'spread' – the difference between bid and ask prices.




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Go live with a $200 trading fund, amd leverage 200:1

Take the highest leverage possible.
200:1 or higher.
Why?
Your margin requirement will be lower, allowing you to open several trading positions without looking back at the column with available margin and worrying about going out of funds and getting a margin call.

$200 is a mini investment, so there is virtually nothing to protect. Compare it to $200 000 investment: traders take lower leverage of 20:1 to protect their investment in case something goes terribly wrong. Large investors also have enough equity to open several trades and add more traders later. In your case, if you take 20:1 leverage, you'll be able to open 1 or 2 trading positions and that's all, your equity isn't large, so you need to leverage it to be be able to trade comfortably.


The only thing to keep in mind is to keep no ore than 3-4 positions open at one time. 1-2 max in the beginning is even better: you'll be able to control your trades better, learn how balance, equity, margin required and available columns in your account behave and what's most important, you won't be overusing your leveraged account, therefore no worries about getting a margin call.


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Forex Trading Guidelines

The guidelines below are based on those written for the original ForexCentral, which proved very popular. They are recommended reading for novice or unsuccessful traders who feel they need to create a trading strategy or add discipline to their current trading strategy.

Always place Stop-Loss orders

The most common and important risk management tool in forex trading is the Stop-Loss order.
A Stop-Loss order ensures a particular position is automatically liquidated at a predetermined price in order to limit potential losses should the market move against your position.
We recommend you always place a Stop-Loss order immediately after a new position is opened, as it can be very tempting to overrun losses on losing trades if a Stop-Loss order hasn't been placed.
So often have I seen situations where a novice trader is 500 points out of the money when he only intended to make or lose 50! By not placing a Stop-Loss order the trader has lost much more than planned, and the Risk/Reward Ratio (guideline 3) is exceedingly poor.
In order to avoid this scenario you must follow a simple rule - Always place Stop-Loss orders, liquidity of the Forex market ensures Stop-Loss orders can be easily executed.

Usually place Take-Profit orders

Aswell as placing Stop-Loss orders, we recommend in most cases to enter Take-Profit orders at the same time using the OCO order function that most trading systems now have. The reason for this is similar to that for placing Stop-Loss orders.

Whereas with losing positions it can be very tempting to overrun losses, with winning positions it can be just as tempting to lock in a profit too early. By placing limits you will eliminate the risk of not being patient enough and taking profit too early.
However, you may feel confident in your ability not to profit take too early, prefering to monitor the market and taking profit at an opportune moment. In this case placing only a Stop-Loss order is an option.

Positive Risk/Reward Ratio

You should always trade using a positive Risk/Reward Ratio. By a positive Risk/Reward ratio we mean "The amount you're willing to make on a trade should be more than or equal to the amount you're willing to lose".
All successful traders trade using a positive Risk/Reward ratio. There is no sense in having five 30 pip winning trades, and then one 200 pip losing trade because at the end of the day you are 50 pips down!
Unfortunately, many novice and unsuccessful traders use a negative Risk/Reward ratio. When trading this way losing positions are always going to be greater than profitable ones, and it can be difficult to recoup the losses in the short term.
It is not uncommon for unsuccessful traders to increase trade size in order to recoup losses quickly, therefore greatly increasing trading risk relative to trading equity (see "Managing your Margin").
This is a recipe for disaster, you must trade with consistancy and control.
The easiest way to manage your Risk/Reward is to use the Stop-Loss and Take-Profit orders mentioned above.

Overtrading

Some online forex brokers now offer 3 to 5 pip spreads in the liquid currencies such as EUR/USD and USD/JPY. These are very competitive prices which a few years ago were unthinkable. As recently as the mid 1990's brokers were quoting 10 pip spreads in the major currencies plus a commission!
Thankfully due to the internet, the current boom in Forex trading and the competition between Forex brokers, those days are well and truly over.
The excellent value available from trading on tight spreads works very much to the traders advantage. However, you should avoid overtrading and entering trades for just a 5-10 pip profit or loss. Even trading this way on 3 pip spreads can adversely affect your profitability.

Below are examples of both a winning trade and losing trade when trading for a 10 pip profit or loss:

Winning Trade:

Buy EUR/USD at 1.2020 (price = 17/20)
Sell EUR/USD at 1.2030 (price = 30/33)

Market moves 13 pips before taking profit

Losing Trade:

Buy EUR/USD at 1.2020 (price = 17/20)
Sell EUR/USD at 1.2010 (price = 10/13)

Market moves 7 pips before taking loss

The above example highlights that the risk/reward of trading for a 10 pip profit or loss is poor.
For the same 10 pips P&L, the market must move 13 pips for your winning position, but only 7 pips for your losing position.

As a general rule of thumb, we recommend that your Take-Profit or Stop-Loss levels are at least 10 times the spread you have traded on. This strategy will help avoid overtrading and improve risk/reward.

Chasing the Market

If you are a day trader or short term trader, in general we recommend not to "chase the market".
By this we mean you shouldn't for example buy Euro after it has already risen 100 pips and is trading at the days highs. Or sell USDJPY after it has come off 150 pips and is trading near the days lows. The rationale behind this is that in many cases the market will consolidate and there will be better opportunities to enter into a new position.
A common scenario when chasing the market is panic buying or selling when a novice trader reverses a position in the hope that they can quickly make back losses. Unfortunately what often happens is that they simply instead end up repeatedly buying the high, and selling the low. This situation must obviously be avoided.

Managing your Margin

We recommend you only risk a maximum of 10% of your total trading equity on a single trade.
10% may sound like too little risk considering many online Forex brokers offer 1% margin or 100 times leverage. However, trading on high leverage can be very risky as you could lose everything in a single trade. By risking only 10% of your equity on a single trade, you will still be able to make good profits from successful trades whilst avoiding the risk of being wiped out during a bad streak.
Even the most profitable traders can have losing streaks in which they could for example have 3 or 4 consecutive losing positions.

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