Forex trading can also play options. A foreign exchange option, otherwise known as currency options, is simply called FX options for short. It refers to a specific derivative tradeable asset which reserves the right to the owner of such instrument but without an accompanying obligation to trade money in one particular currency into another currency at a pre-determined and agreed currency conversion rate on a specific pre-specified date.
Buying calls and puts are the basic moves involved in FX options trading. A call is a player’s decision to buy, whereas a put is a decision to sell. The strike price is also known as the exercise price and is the pre-agreed price at which the trader can buy or sell the underlying FX option.
A call or a put allows a leveraged position where a player in the forex options market ventures on a directional play with a limited risk to a premium paid. The main advantage of trading forex options spread is to avoid being stopped out on a position and to allow time for the position to work out. Every options trader aims to attain a powerful position at the expiration of the pre-specified trading period. This article distinguishes between two FX options trading strategies.
Trading Regular Forex Options Spreads
When a player trades forex options spreads, the goal is to limit the gains and the cost of participating in the trade. In this type of play, the most that a trader can earn is the difference between the strike prices. This move is advantageous to a player in that it conserves his or her trading capital. The main limitation, however, is that when the underlying currency goes over the strike prices, the player can not participate in the move.
Trading Calendar Spreads
In this strategy, a player puts on a call or put spread with both legs at the same or at different strike prices but at different months. In a call calendar spread, the trader predicts that the prices of the currency pair will increase within the period. Conversely, in a put spread, the trader anticipates the currency pair prices will decrease. The advantage of this strategy is that it facilitates a play on fundamental events that may take a bit longer. A good use of the calendar spread strategy is when one is anticipating a shift in a country’s economic cycle, an impending recession, or a seasonal effect that can affect currency rates to enjoy a surge or to suffer a decline.
Busy traders usually go safe with the regular spread trading strategy. Those who love to analyze or predict trends love the calendar strategy. On the whole, FX options trading is volatile and if one loves the adrenaline rush, FX options trading definitely rocks!
Friday 21 November 2014
Sunday 9 November 2014
Forex Leverage and Its Importance
One reason why a lot of people prefer to trade in forex, instead of other financial instruments, is because it can provide a higher leverage than the ones offered for stocks. Most traders have already heard about forex leverage. However, only a few understand what it is all about, how it works and how it can influence a trader's bottom line.
Leverage involves the process of borrowing an amount required for investment. In the field of foreign exchange, the money or amount is usually borrowed from brokers. The foreign exchange industry can expect to provide high leverage that it allows traders to control and build up a substantial amount, based on an initial margin requirement.
The concept behind using it is no longer new to a few trading companies and investors. A lot of investors use it as a means of dramatically increasing investment returns. They try to lever their planned investments with the help of financial instruments including options, margin accounts and futures. Companies can also use this concept as a means of financing their assets. This means that companies get the chance to utilize debt financing to make an investment in business operations to boost shareholder value, instead of issuing stocks when attempting to raise capital.
In the field of forex trading, most investors make use of leverage to generate profits from exchange rate fluctuations between two countries. It is a loan provided by a reliable broker who handles the forex account of an investor. The investor will need to contact his broker in order to create a margin account upon deciding to invest in the market. In most cases, the provided leverage amount will be dependent upon the size of the trading position of the investor as well as his broker. It is also usually expressed in a ratio. It is also dependent upon the margin requirements that your chosen broker imposes.
In most cases, professional and seasoned traders usually trade using very low forex leverage. The reason behind this is that they believe that keeping the amount low can help in protecting their capital in case they commit trading mistakes. This move also supports receiving consistent returns. It should also be noted that forex trading can offer lots of profitable opportunities to traders. With the help of the right leverage amount, it is possible for a trader to magnify the provided opportunities.
Just make sure to remember that using it requires a full understanding about a few risk management techniques. It also requires you to understand how significant it is to use correctly defined stop-loss orders. Another thing that can help you achieve success is to be disciplined, especially in following rules that are essential, in taking full advantage of the leveraged forex market.
Leverage involves the process of borrowing an amount required for investment. In the field of foreign exchange, the money or amount is usually borrowed from brokers. The foreign exchange industry can expect to provide high leverage that it allows traders to control and build up a substantial amount, based on an initial margin requirement.
The concept behind using it is no longer new to a few trading companies and investors. A lot of investors use it as a means of dramatically increasing investment returns. They try to lever their planned investments with the help of financial instruments including options, margin accounts and futures. Companies can also use this concept as a means of financing their assets. This means that companies get the chance to utilize debt financing to make an investment in business operations to boost shareholder value, instead of issuing stocks when attempting to raise capital.
In the field of forex trading, most investors make use of leverage to generate profits from exchange rate fluctuations between two countries. It is a loan provided by a reliable broker who handles the forex account of an investor. The investor will need to contact his broker in order to create a margin account upon deciding to invest in the market. In most cases, the provided leverage amount will be dependent upon the size of the trading position of the investor as well as his broker. It is also usually expressed in a ratio. It is also dependent upon the margin requirements that your chosen broker imposes.
In most cases, professional and seasoned traders usually trade using very low forex leverage. The reason behind this is that they believe that keeping the amount low can help in protecting their capital in case they commit trading mistakes. This move also supports receiving consistent returns. It should also be noted that forex trading can offer lots of profitable opportunities to traders. With the help of the right leverage amount, it is possible for a trader to magnify the provided opportunities.
Just make sure to remember that using it requires a full understanding about a few risk management techniques. It also requires you to understand how significant it is to use correctly defined stop-loss orders. Another thing that can help you achieve success is to be disciplined, especially in following rules that are essential, in taking full advantage of the leveraged forex market.
Thursday 23 October 2014
Why Paper Trading May Not Teach You Everything You Need to Know About Currency Trading
Opening and practicing with a dummy account is still the best way to learn how to trade in the currency markets. Having said that, however, the beginning trader should realize that there are many limitations to using a paper account to trade forex and it may ultimately not teach him everything he needs to know to become a successful trader. Here’s why.
1. You’ll behave differently when real money is on the line. Think about this: when you’re trading with fake money, you’re more inclined to make risky trades that you would never even consider if you were trading with actual money. You might choose to close out your position in a real trade rather than taking this big risk. Or you might make the trade but hedge your bets by carefully setting your stop loss orders in order to limit your losses.
2. You won’t develop the discipline necessary to become a successful trader in the long run. When you’re trading with fake money, you can do anything you want since you know you’re not going to sustain any losses. On the other hand, if you are trading with real money, a certain healthy fear will creep in that will train you to be more cautious. But then again, it depends on your trading personality, since some traders are willing to make risky trades for the chance to make big profits.
3. You might become overconfident. As you may have noticed by now, trading in a dummy account is substantially different from trading live. Just because you can build up a dummy account does not mean that you can do the same when you’re trading with actual money. But the problem is, you might take that attitude with you when you start making live trades, that belief that you can do anything and you’re unbeatable, which may result in big losses for you.
So does this mean that you should not learn forex trading using a dummy account? Of course not; it just means that you should be aware of the limitations of learning trading using paper trades so that you can adjust your training accordingly. Paper trading allows you to learn the technical aspects of forex trading, such as how news developments can signal trading opportunities, without having to shell out real money. However, while you’ve learning everything that you can from a dummy account, you might want to slowly start trading with a live account as well to gain practice and apply what you’ve learned in a real-world setting. Perhaps you can seek out a mentor, in the form of a more experienced trader, who can supervise you in your trades while you’re learning self-discipline and risk management. Or if you believe that you have the self-discipline, you can train yourself.
1. You’ll behave differently when real money is on the line. Think about this: when you’re trading with fake money, you’re more inclined to make risky trades that you would never even consider if you were trading with actual money. You might choose to close out your position in a real trade rather than taking this big risk. Or you might make the trade but hedge your bets by carefully setting your stop loss orders in order to limit your losses.
2. You won’t develop the discipline necessary to become a successful trader in the long run. When you’re trading with fake money, you can do anything you want since you know you’re not going to sustain any losses. On the other hand, if you are trading with real money, a certain healthy fear will creep in that will train you to be more cautious. But then again, it depends on your trading personality, since some traders are willing to make risky trades for the chance to make big profits.
3. You might become overconfident. As you may have noticed by now, trading in a dummy account is substantially different from trading live. Just because you can build up a dummy account does not mean that you can do the same when you’re trading with actual money. But the problem is, you might take that attitude with you when you start making live trades, that belief that you can do anything and you’re unbeatable, which may result in big losses for you.
So does this mean that you should not learn forex trading using a dummy account? Of course not; it just means that you should be aware of the limitations of learning trading using paper trades so that you can adjust your training accordingly. Paper trading allows you to learn the technical aspects of forex trading, such as how news developments can signal trading opportunities, without having to shell out real money. However, while you’ve learning everything that you can from a dummy account, you might want to slowly start trading with a live account as well to gain practice and apply what you’ve learned in a real-world setting. Perhaps you can seek out a mentor, in the form of a more experienced trader, who can supervise you in your trades while you’re learning self-discipline and risk management. Or if you believe that you have the self-discipline, you can train yourself.
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