Archive for the "Trading" Category
Margin trading (or trading with the leverage) is a specific peculiarity of financial markets and a very attractive opportunity for traders. Thanks to the cash borrowed from a broker investors are able to carry out trades with volumes that exceed several times the size of their own capital.
To get a loan an investor should deposit a required sum of money– a margin that serves as collateral and prevents the client’s debt obligations from growing. A margin ensures that losses of a trader will not exceed the actual size of deposit. If losses are approaching the size of margin, a trader should replenish the trading account. Otherwise broker will automatically close all open positions. A signal indicating that a trader should replenish the deposit is called margin call.
The sum of a margin (collateral) depends on the size of the leverage and volume of trades. For example, with 1:100 leverage and $100 equity, a trader will get $10000 to carry out deals. If you open a $ 5000 deal, then considering the leverage, a margin should be $50, i.e. client’s funds cover only a part of a deal, the rest is paid by money borrowed from the broker. If the deal is closed with profit, then all the money get with the help of the leverage is transferred to trader’s account. Thus, with favorable circumstances it is possible to improve your financial situation quickly and effectively. Margin is frozen in the trading account; a trader is free to use the rest of the deposit. If a trader suffers losses that exceed the certain part of the collateral, positions can be closed automatically. Different brokerage firms set different margin call requirements.
If you would like to avoid a margin call, you should use limiting orders as Stop Loss and Take Profit as they will allow you to set the target profits and permissible loss level.
On Forex the leverage is provided for free and for unlimited term unlike stock markets that usually charge for this service. While opening a margin account with Forex-broker a trader usually can define at once the size of leverage and begin to carry out deals. Some years ago 1:200 leverage was astonishing. Nowadays brokers can provide their clients with 1:1000 leverage! But as a rule traders are satisfied with 1:50 and 1:100 leverages. Some traders prefer 1:5 leverage and some of them refrain from using leverages. In short, everything depends on strategy and trading style.
It is necessary to keep in mind that big profits are always related to big risks. The higher the leverage is, the higher the risk of losing a deposit is. You should choose the leverage according to your experience.
The usage of the leverage will be effective and justified if your approach to money management is reasonable. Also it is necessary to control the equity and refrain from opening deals with huge lots. In this case the profitability of deals can be increased significantly.
Added by Roman Tsepelev,
InstaForex development manager
One can answer this question having estimated financial status, spare time and personality. Everybody who is familiar with the specificity of Forex market knows, that there are a few regimes of trading and hundreds of strategies, that is why a person can make an individual scheme of investing. Thus there is no super profitable system, still it is important to select the methods that are most convenient for you.
For example, long-term trading will be convenient for those who have considerable capital which can stand significant price fluctuations. The trades remain open for a long period of time – for months and even for years. If a trader has some skills of capital management and is able to make efficient analysis then the risk of losses becomes minimal. Trading long-tem requires less time spent in front of the computer, as there is no need to control trades 24 hours a day. Consequently, the stress is lower. Aside from that it is advisable to keep in mind that this strategy involves certain patience as it does not bring fast result. Moreover, not all instruments of the currency market are appropriate for long-term trading.
Intraday trading (short-term) demands less money, private traders as a rule conduct a lot of trades during the trading day which are of smaller volumes thus they get profit from short-term currency fluctuations. If the situation slightly changes for the negative, then it is possible to exit the market right away and the risks are not high, if one follows the rules of money management. However, the intraday trader should be stress resistant as he / she has to estimate the situation instantly and make fast decisions. The prices are constantly altering and it is impossible to have a free moment from the screen in order not to miss a profitable moment for conducting deals.
Midterm trading is peculiar as positions here are open for approximately 10 days. Thus there is some time for precise analysis and making a proper choice. In this case a larger initial capital can be necessary. The pressure is lower and the potential gain is higher. Still it should be kept in mind that exiting a trade when you want can be difficult.
Individual trader is also considered as a profession. And every occupation requires professional skills as well as certain traits of character depending on the type of personality. Theoretically determining the sphere of activity, individual features of temper should also be considered in order to use one’s individual potential correctly. Thus in trading, having estimated one’s potential adequately, it is possible to find a more appropriate style of trading. The profit should not be the decisive moment here, as no strategy can guarantee instant wealth. At the same time every method of trading should be successful if one plans the trades correctly.
Added by Svetlana Degtyareva,
InstaForex Clients’ relationship manager
The modern currency trading technologies enable the taking of big profits in a short period of time: brokers provide their clients with leverages; client terminals support the function of automatic trading etc. Indeed, with Forex it is possible to become rich in a moment but it is also possible to lose everything at once.
Let us discuss the main market and non-market risks.
Exchange rates volatility
One of the main properties of Forex is its volatility that reflects the dynamics of prices. The market is considered as volatile if there are frequent and significant price fluctuations. Price spikes can lead to financial losses. While opening a deal a trader should consider that prices are subject to various fluctuations. Therefore, it is necessary to control the opened positions or to place limit orders.
Dynamics of prices is affected by various economic and political events as well. The release of breaking news can provoke significant price changes. Moreover, from time to time the central banks carry out the currency interventions in order to influence the exchange rate of the national currencies. Interest rates also play an important role as they can lead to the changes in exchange rates.
The risk of using a leverage
Leverage serves as a comfortable and effective trading tool. The profitability of deals can be significantly multiplied if you use the assets borrowed from a broker. The higher the profit is, the greater the risks are. The losses cannot exceed the equity of a trader, but if a trader uses a big leverage, then even the slightest price movement in the opposite direction can reduce the deposit to zero.
In order to control deals and to find a right moment for making a buy or a sell deal, a trader needs a computer and a constant access to the Internet. There is always a possibility of unexpected power cutoff, equipment errors or disconnection. As a rule such alternative devices as smartphones, laptops and tablet computers can be a good solution.
Unfortunately, while trading on Forex there is a risk to choose an unreliable broker. But it is quite easy to find a reliable company as there are lots of comments in the Internet. While opening an account you should learn the information concerning the organization, check out the presence of all necessary licenses, read attentively the trading conditions. These measures are essential for security.
Prestigious brokers are not really interested in losses of their clients. That is the reason why they try to ensure the maximum transparency of their activity and propose the effective trading instruments. Reliable companies neither deliberately change the exchange rates nor play against the client! Moreover, you can detect such “bucket shops”, you just need to be cautious.
Available trading and high speed of deals execution can seem easy and simple. If you consider the trading as an exciting game, you can pay for this with your own money. A trader’s decision is influenced by various psychological factors. Therefore, it is necessary to learn how to control your emotions.
Added by InstaForex Staff
Charles Dow is often considered as the founder of the technical analysis. Jointly with his companion he implemented the famous Dow Jones industrial average, created one of the leading world financial information agencies and began the publishing of the comprehensive financial data. Moreover, he wrote several articles concerning the financial market.
The suggestions described in these publications were later summarized. Today they are known as Dow theory. This theory became fundamental for the modern technical analysis. Though Dow described the processes occurring at the securities market, his theory is applicable to the other financial markets.
Charles Dow paid a lot of attention to the well-known principles as directed character of the price changes, cyclical character of the market processes, the interrelation between the trading volume and exchange rates etc. The theory is based on 6 tenets
1. The market has three types of movements
Dow confirms that trends can be subdivided into primary (long-term) trends, secondary (intermediate) trends and minor (short-term) trends. Each type of trend is in turn an upward or downward. The upward trend means that each high and low is higher than the previous one. In the downward trend each high and low is located lower than the previous one.
The primary trend may last from less than a year to several years. The secondary trend serves as a correction and usually lasts for over 3 months. The minor trend is defined as lasting for less than three weeks reflecting the short-term market fluctuations.
2. Market trend has three phases
Phases of the long-term trend are: an accumulation phase, a public participation phase, and a distribution phase.
During the first phase provident investors with significant capital make trade operations that appear to be against the general opinion of the market. The second phase begins when active and technically oriented traders take part. These traders are intended to follow the market trends. The phase is accompanied by the strengthening of the trend and price changes. Then begins the third phase: the public is fully involved in the market resulting in agiotage. Thanks to the experienced investors begins the new accumulation phase.
3. The stock market averages must confirm each other
According to Dow, the industrial and transportation averages must confirm the current trend and provide signals of its reversal with slight divergence in time.
4. The market discounts everything
Everyone knows the expression “the price accounts everything”. Charles Dow supposed that the market responds very quickly to any information. Any factor that can affect the demand or supply is immediately reflected in dynamics of price and averages.
5. Trends are confirmed by volume
6. Trends exist until definitive signals prove that they have ended
A trend will be changed in any case, but if the signals of price changes are not clear, this fact can be considered as a signal of temporary corrective movement, but not as a sign of a trend reversal.
Thus, it is evident that some part of these assumptions is applicable to the Forex market. The ideas of Charles Dow are relevant even now despite more than 100-years history and the fact that the modern analytical tools emerged.
Added by Kristina Leshkevich,
InstaForex Clients’ relationship manager
The history of the index began in the XIX century. It was implemented in 1896. At that time there were only few instruments for analysis and description of the processes that took place at the stock market. Therefore, a question concerning the elaboration of these instruments became more and more urgent. The evaluation method of market trends proposed by Dow and Jones became the real innovation and significantly simplified the life of most businessmen. Firstly, index took into account 11 large US companies (9 of them were railroad companies). It was calculated as simple average of their stocks value. Despite the fact that more than 100 years have passed and accounting method has undergone significant changes, the Dow Jones index remains an important benchmark for global investors even now. Today it includes over 30 leading American companies.
Charles Dow (1851 –1902) and Edward Jones (1856–1920) were friends and companions. Both of them were gifted as journalists and businessmen. Together they worked in the sphere of financial news. In 1882 Dow and Jones started their own business in New York. Their office was located in the basement of the confectioner’s shop where they began publishing the small financial news bulletin under the title Customer’s Afternoon Letter. This bulletin became popular very soon; the number of printed copies was increasing; investors appreciated the benefits of the given information, though at that time this information could be defined as insider.
In 1889 the partners published the comprehensive edition of The Wall Street Journal created for financial and commercial circles. It was focused on providing the breaking and reliable news. The Wall Street Journal is that very edition which has been publishing the Dow Jones index since 1896. The edition is still considered as confident and today the number of printed copies exceeds 2 million. For a long time the newspaper did not have a real counterpart. The contemporary counterpart of the WSJ is famous Financial Times of London.
In fact, there are some other Dow Jones indices (transportation index, utility index, composite index, etc.) that characterize the different economic fields. But only the industrial index is considered as the most popular serving as a barometer of the stock market. This index is fundamental for institutional and private investors. And this is quite reasonable, as the 100-year practice confirmed that this function is accomplished properly. The index comprises the mature and reliable companies with 1/5 of the market value of all American stocks.
Dow Jones index was appreciated not only as an impartial indicator of the US stock exchange market, but also as one of the country’s economy in general.
Added by Kristina Leshkevich,
InstaForex Clients’ relationship manager