Investors get attracted to forex rather than stocks because of its higher leverage options. The term ‘leverage’ is very common in the world of financial markets; however, few actually have a clue of what the term really is.
What is ‘Leverage’?
Leverage is all about borrowing a particular amount of money required for investing. In forex’s case, the money is usually on loan from the broker. Trading in forex indeed offers a high leverage in a sense that for a particular margin requirement, a trader can control a large amount of money.
How do you calculate margin-based leverage?
To calculate margin-based leverage, simply divide the value of the total transaction by the margin amount you need to put up.
To illustrate further, if what you need is 1% of your total transaction value, and you intend to trade a lot of USD/CHF equivalent to 100,000 US dollars, then you require 1,000 US dollars. Consequently, your margin-based leverage should be a ratio of 100:1. If your margin requirement is 25%, then by using the same formula, you’ll come up with a margin-based leverage of 400:1.
Take note that the margin-based leverage does not affect the risks. It may not influence the trader’s gains or losses. The investor can choose to attribute higher than the needed margin for a particular position
The more important factor is the real leverage, rather than the margin-based one.
How do you calculate real leverage?
Real leverage is calculated by dividing the open positions’ total face value by the amount of your trading capital.
If you have $10,000 in your trading account, and you open a standard lot equivalent to $100,000 position, then you’ll be trading on your account with 10x leverage. If two standard lots are traded, then the leverage is 20x, and so on and so forth.
Forex Trading Leverage
The currency movements in forex are traded in pips (the smallest currency price change). Depending on the currency pair, it could be in the price’s second or even fourth decimal place.
Hence, transactions should be done in huge amounts to allow the little price movements to be translated into acceptable and decent profits. In forex trading, you are provided with the freedom and flexibility to choose the real leverage amount depending on your trading style, money management preferences and your personality.
Remember the Risk
Your real leverage will have the potential to enlarge your gains and losses and both will have the same magnitude. The larger the amount of leverage, then the higher is your assumed risk.
Your trade can be given more breathing room by using a smaller amount of real leverage on each by implementing a wider but a more reasonable stop to prevent risking your money. A trade that’s highly leveraged can deplete your trading account fast which will lead to greater losses.
Leveraging is flexible and customizable. You don’t have a deadline to meet. Take your time if you aim for a profit.
Friday 27 December 2013
Friday 20 December 2013
How to Choose a Forex Broker
It’s necessary to find a reliable forex broker, but the act of choosing is a very difficult task. With a lot of choices out there, how would you make sure that you picked out the right one?
Use this guide to narrow your choices down.
Do Your Research
There’s a wide range of choices of brokers that will help you in your trading activities. There are a lot of things you should consider though.
Check the regulatory compliance. If the broker is reputable and reliable, then they’d be a member of the National Futures Association (NFA). Not only that, they should also be registered with Commodity Futures Trading Commission (CFTC).
You’d like to make sure that your deposits are safe, and your broker has integrity, and so you should only do accounts with duly regulated firms.
Every forex broker has their own account offerings.
Check their Customer Service Options
Forex trading can take place anytime, so make sure they have a support platform available anytime too. Preferably, there should be the ease of talking to a live person rather than an automated attendant which could be frustrating.
Offered Currency Pairs
A broker will have a wide range of pairs to choose from, but make sure that they will have the pair that interests you the most. Great deals of currencies are available but only a few has the majority’s attention, and so, they trade with the greatest liquidity.
Forex Platforms
The platforms will be your portal to the forex markets; therefore, you should choose a platform that won’t give you a hard time. Your first few days in forex is struggle enough; don’t add to your grief by choosing a platform that you can’t navigate with ease.
Use this guide to narrow your choices down.
Do Your Research
There’s a wide range of choices of brokers that will help you in your trading activities. There are a lot of things you should consider though.
Check the regulatory compliance. If the broker is reputable and reliable, then they’d be a member of the National Futures Association (NFA). Not only that, they should also be registered with Commodity Futures Trading Commission (CFTC).
- NFA – a self-regulatory commission in the US. They develop programs and rules that will protect the market’s integrity. They also help members meet the required responsibilities.
- CFTC – an independent agency that regulates US commodity options and futures markets. Their mission is to protect the users from manipulation, fraud and abusive practices related to selling commodities as well as financial futures and options; they also foster competitive, open markets that are sound financially.
You’d like to make sure that your deposits are safe, and your broker has integrity, and so you should only do accounts with duly regulated firms.
Every forex broker has their own account offerings.
- Commissions / spreads
- A broker will make money by their commissions and spreads. If a broker works on commissions, then they may charge a spread’s particular percentage, the bid’s difference and the forex pair’s ask price.
- A broker may tell you they don’t charge any commission, but will instead make money through wider spreads. Take note, though, that the wider the spread, the harder it will be to have some profit.
- Initial Deposit
- Usually, forex accounts don’t need such a huge capital. Using leverage, the purchasing power is higher than the minimum deposit which makes trading in forex attractive to investors and traders. Brokers can offer three accounts: standard, mini and micro, with varying deposit requirements.
Check their Customer Service Options
Forex trading can take place anytime, so make sure they have a support platform available anytime too. Preferably, there should be the ease of talking to a live person rather than an automated attendant which could be frustrating.
Offered Currency Pairs
A broker will have a wide range of pairs to choose from, but make sure that they will have the pair that interests you the most. Great deals of currencies are available but only a few has the majority’s attention, and so, they trade with the greatest liquidity.
Forex Platforms
The platforms will be your portal to the forex markets; therefore, you should choose a platform that won’t give you a hard time. Your first few days in forex is struggle enough; don’t add to your grief by choosing a platform that you can’t navigate with ease.
Tuesday 17 December 2013
Forex Trading Basics
Foreign exchange (Forex) trading involves buying and selling of currencies. Transactions happen in the forex trading market, which is considered as the biggest and most liquid trading market in the world – for a very good reason. The average daily trading volume easily exceeds $1.9 trillion; and this includes practically every known currency the world over.
In major financial cities such as New York, Zurich, Sydney, and Hong Kong, the trading markets are open 24 hours a day, 5 days a week. Before the advent of the internet, only big companies, banks, institutional investors, and hedge funds could afford to trade in the currency market. The internet changed all that as even small investors can now buy and sell currencies.
The Forex Market Explained
Currencies play a major role in world economy. To make it possible for businesses to transact on a global level, and for individuals to travel to foreign countries, currency exchange must be facilitated. Unlike commodities and stocks that are traded on a physical exchange floor, forex trading can happen online.
Prices of the different currencies are based on the law of supply and demand, placing currencies among the most volatile investment vehicles available. Small but frequent price movements happen on a daily basis.
To enable investors to make more money from trading, leverage is used. They get to control a huge sum for a small amount of investment. Simply put, this is no different from borrowing money to increase the ROI. It is therefore possible to use leverage at say, a 250:1 ratio; meaning, you only need to invest $1,000 in order to control $250,000 in currencies.
The forex market offers a host of possibilities for investors to consider. For one, you decide when to stay or exit a particular position. This could mean anywhere from a few minutes to several months.
How Trading Is Done
There are basically 3 ways to trade Forex.
• Spot Market – This is the biggest market that lets investors buy and sell at current prices that are dictated by supply and demand.
• Forward Market – Here, actual currencies are not traded. Two investors instead enter into an agreement to buy and/or sell particular currencies at a specified time and price. In this market, contracts are traded OTC or over the counter.
• Futures Market – Investors in this type of market deal with standard futures contracts on commodity exchanges such as the NY Mercantile Exchange. Although many proponents claim that this option is easy and profitable for the average trader, it is actually not as simple as these people portray the futures market to be.
No one can say which particular trading method will work well on an investor but the person himself. With proper education, a prospective investor can decide for himself the type of trading method that will best work for his trading needs and goals.
In major financial cities such as New York, Zurich, Sydney, and Hong Kong, the trading markets are open 24 hours a day, 5 days a week. Before the advent of the internet, only big companies, banks, institutional investors, and hedge funds could afford to trade in the currency market. The internet changed all that as even small investors can now buy and sell currencies.
The Forex Market Explained
Currencies play a major role in world economy. To make it possible for businesses to transact on a global level, and for individuals to travel to foreign countries, currency exchange must be facilitated. Unlike commodities and stocks that are traded on a physical exchange floor, forex trading can happen online.
Prices of the different currencies are based on the law of supply and demand, placing currencies among the most volatile investment vehicles available. Small but frequent price movements happen on a daily basis.
To enable investors to make more money from trading, leverage is used. They get to control a huge sum for a small amount of investment. Simply put, this is no different from borrowing money to increase the ROI. It is therefore possible to use leverage at say, a 250:1 ratio; meaning, you only need to invest $1,000 in order to control $250,000 in currencies.
The forex market offers a host of possibilities for investors to consider. For one, you decide when to stay or exit a particular position. This could mean anywhere from a few minutes to several months.
How Trading Is Done
There are basically 3 ways to trade Forex.
• Spot Market – This is the biggest market that lets investors buy and sell at current prices that are dictated by supply and demand.
• Forward Market – Here, actual currencies are not traded. Two investors instead enter into an agreement to buy and/or sell particular currencies at a specified time and price. In this market, contracts are traded OTC or over the counter.
• Futures Market – Investors in this type of market deal with standard futures contracts on commodity exchanges such as the NY Mercantile Exchange. Although many proponents claim that this option is easy and profitable for the average trader, it is actually not as simple as these people portray the futures market to be.
No one can say which particular trading method will work well on an investor but the person himself. With proper education, a prospective investor can decide for himself the type of trading method that will best work for his trading needs and goals.
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