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.
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