Wednesday, June 19, 2013

Forex Trading Market Orders

For some traders you may hear the terms trailing stop loss and stop loss order and wonder exactly what these are and how a stop loss can enhance a trading strategy. 


Let’s start with the basics, defining a stop loss order and other types of orders.

-Order Types-

Market Order  is an order to buy or sell at the best available price.

For Example:  The bid price for EUR/USD is currently at 1.2140 and the ask price is at 1.2142. If you wanted to buy EUR/USD at market, then it would be sold to you at the ask price of 1.2142. You would click buy and your trading platform would instantly execute a buy order at that exact price.

Limit Entry Order is an order placed to either buy below the market or sell above the market at a certain price.
 
For Example: The  EUR/USD is currently trading at 1.2050. You want to go short if the price reaches 1.2070. You can either sit in front of your monitor and wait for it to hit 1.2070 (at which point you would click a sell market order), or you can set a sell limit order at 1.2070 (then you could walk away from your computer to attend your ballroom dancing class).

If the price goes up to 1.2070, your trading platform will automatically execute a sell order at the best available price.You use this type of entry order when you believe price will reverse upon hitting the price you specified.
  
Stop-Entry Order is an order placed to buy above the market or sell below the market at a certain price.

For Example: The GBP/USD is currently trading at 1.5050 and is heading upward. You believe that price will continue in this direction if it hits 1.5060. You can do one of the following to play this belief: sit in front of your computer and buy at market when it hits 1.5060 OR set a stop-entry order at 1.5060. You use stop-entry orders when you feel that price will move in one direction.

Stop-Loss Order is a type of order linked to a trade for the purpose of preventing additional losses if price goes against you. REMEMBER THIS TYPE OF ORDER. A stop-loss order remains in effect until the position is liquidated or you cancel the stop-loss order.

For Example: As you went long (buy) EUR/USD at 1.2230. To limit your maximum loss, you set a stop-loss order at 1.2200. This means if you were wrong and EUR/USD drops to 1.2200 instead of moving up, your trading platform would automatically execute a sell order at 1.2200 the best available price and close out your position for a 30-pip loss.

Stop-losses are extremely useful if you do not want to sit in front of your monitor all day worried that you will lose all your money. 

Trailing Stop is a type of stop-loss order attached to a trade that moves as price fluctuates.

For Example: The USD/JPY at 90.80, with a trailing stop of 20 pips. This means that originally, your stop loss is at 91.00. If price goes down and hits 90.50, your trailing stop would move down to 90.70.
Just remember though, that your stop will STAY at this price. It will not widen if price goes against you. 

Going back to the example, with a trailing stop of 20 pips, if USD/JPY hits 90.50, then your stop would move to 90.70. However, if price were to suddenly move up to 90.60, your stop would remain at 90.70.
Your trade will remain open as long as price does not move against you by 20 pips. Once price hits your trailing stop, a stop-loss order will be triggered and your position will be closed.

-Other Terms-


Good 'Till Cancelled (GTC) an order remains active in the market until you decide to cancel it. Your broker will not cancel the order at any time. Therefore it's your responsibility to remember that you have the order scheduled.

Good for the Day (GFD) an order remains active in the market until the end of the trading day. Because foreign exchange is a 24-hour market, this usually means 5:00 pm EST since that is the time U.S. markets close, but we'd recommend you double check with your broker.

One-Cancels-the-Other (OCO) an order is a mixture of two entry and/or stop-loss orders. Two orders with price and duration variables are placed above and below the current price. When one of the orders is executed the other order is canceled.

For Example: The price of EUR/USD is 1.2040. You want to either buy at 1.2095 over the resistance level in anticipation of a breakout or initiate a selling position if the price falls below 1.1985. The understanding is that if 1.2095 is reached, your buy order will be triggered and the 1.1985 sell order will be automatically canceled.

One-Triggers-the-Other
An OTO is the opposite of the OCO, as it only puts on orders when the parent order is triggered. You set an OTO order when you want to set profit taking and stop loss levels ahead of time, even before you get in a trade

For Example:  The USD/CHF is currently trading at 1.2000. You believe that once it hits 1.2100, it will reverse and head downwards but only up to 1.1900. The problem is that you will be gone for an entire week and there is no available internet.

In order to catch the move while you are away, you set a sell limit at 1.2000 and at the same time, place a related buy limit at 1.1900, and just in case, place a stop-loss at 1.2100. As an OTO, both the buy limit and the stop-loss orders will only be placed if your initial sell order at 1.2000 gets triggered.



Conclusions to this topic, The basic order types (market, limit entry, stop-entry, stop loss, and trailing stop) are usually all that most traders ever need. Stick with the basic stuff first. Make sure you fully understand and are comfortable with your broker's order entry system before executing a trade.

Also, always check with your broker for specific order information and to see if any rollover fees will be applied if a position is held longer than one day. Keeping your ordering rules simple is the best strategy.

For more details about Forex Trading with ICM Brokers, please click the link: www.ICMBrokers.com and feel free to access our product and services that can help you easily to trade.


Thursday, June 13, 2013

Leverage in Forex Trading

What Is Leverage? 
Leverage involves borrowing a certain amount of the money needed to invest in something. In the case of Forex, that money is usually borrowed from a broker. 
Forex trading does offer high leverage in the sense that for an initial margin requirement, a trader can build up and control a huge amount of money.

Investors use leverage to profit from the fluctuations in exchange rates between two different countries. The leverage that is achievable in the Forex market is one of the highest that investors can obtain. Leverage is a loan that is provided to an investor by the broker that is handling his or her Forex account. When an investor decides to invest in the Forex market, he or she must first open up a margin account with a broker. Usually, the amount of leverage provided is either 50:1, 100:1 or 200:1, depending on the broker and the size of the position the investor is trading. Standard trading is done on 100,000 units of currency, so for a trade of this size, the leverage provided is usually 50:1 or 100:1. Leverage of 200:1 is usually used for positions of $50,000 or less.

Here is a sample chart of how much account balance changes if prices moves depending on your leverage.
Leverage
% Change in Currency Pair
% Change in Account
100:1
1%
100%
50:1
1%
50%
33:1
1%
33%
20:1
1%
20%
10:1
1%
10%
5:1
1%
5%
3:1
1%
3%
1:1
1%
1%

Example Situations:

Day 1. A mini account with $500 which trades $10K mini lots and only requires .5% margin.

You buy 2 mini lots of EUR/USD. Your true leverage is 40:1 ($20,000 / $500). You place a 30-pip stop loss and it gets triggered. Your loss is $60 ($1/pip x 2 lots).

You have just lost 12% of your account ($60 loss / $500 account). Your account balance is now $440. 

Trade #
Starting Account Balance
# Lots of Used
Stop Loss (pips)
Trade Result
Ending Account Balance
1
$500
2
30
-$60
$440

Day 2. You decide to double up and you buy 4 mini lots of EUR/USD. Your true leverage is about 90:1 ($40,000 / $440). You set your usual 30-pip stop loss and your trade loses. Your loss is $120 ($1/pip x 4 lots).

You have just lost 27% of your account ($120 loss/ $440 account). Your account balance is now $320.
Trade #
Starting Account Balance
# Lots of Used
Stop Loss (pips)
Trade Result
Ending Account Balance
2
$440
4
30
-$120
$320
 
Day 3. You believe the tide will turn so you trade again. You buy 2 mini lots of EUR/USD. Your true leverage is about 63:1. You set your usual 30 pip stop loss and lose once again! Your loss is $60 ($1/pip x 2 lots).
You have just lost almost 19% of your account ($60 loss / $320 account). Your account balance is now $260.
Trade #
Starting Account Balance
# Lots of Used
Stop Loss (pips)
Trade Result
Ending Account Balance
3
$320
2
30
-$60
$260
 
Day 4. You are getting frustrated. You try to think what you are doing wrong. You think your setting your stops too tight.
The next day, you buy 3 mini lots of EUR/USD. Your true leverage is 115:1 ($30,000 / $260). You loosen your stop loss to 50 pips. The trade starts going against you and it looks like you are about to get stopped out yet again! But what happens next is even worse! You get a margin call!
Since you opened 3 lots with a $260 account, your Used Margin was $150 so your Usable Margin was a measly $110. The trade went against you 37 pips and because you had 3 lots opened, you get a margin call. Your position has been liquidated at market price.


Trade #
Starting Account Balance
# Lots of Used
Stop Loss (pips)
Trade Result
Ending Account Balance
4
$260
3
50
Margin Call
$150

The only money you have left in your account is $150, the Used Margin that was returned to you after the margin call.

The Summary of your trading account has gone from $500 to $150. A 70% loss! It would not be very long until you lose the rest.
Trade # Starting Account Balance # Lots of Used Stop Loss (pips) Trade Result Ending Account Balance
1 $500 2 30 -$60 $440
2 $440 4 30 -$120 $320
3 $320 2 30 -$60 $260
4 $260 3 50 Margin Call $150

A four trade losing streaks is not uncommon. Experienced traders have similar or even longer streaks. 

To avoid such a catastrophe, Some Forex traders use low leverage and most use their leverage at 5:1 but rarely go that high and stay around 3:1. Other experienced traders succeed because they use proper capitalization which allows to realize losses that are very small and allows you to trade another day.



To know more about our ICM Brokers Contract Specifications please click the link: ICMBrokers Contract Specifications