Tag Archives | definition

Sizing

Sizing is very important in Forex trading. Sizing determines lot size for one open trade position. Each open trade position can have different lot size. In Forex trading, trading unit known as ‘lot’. ‘Lot’ represents the minimum quantity of currency that may be traded. ‘Lot’ determines how much money the trader puts in one trade position. One lot size equals to certain dollar amount. It has correlation with forex account type.

The main goal of sizing is to protect capital. Trader must realize that not all trades are profitable. There will be losses in some trades. With right sizing, traders minimize/control their losses. Trading with right lots size is important for increasing profits, reducing losses, controlling risks during the trade (sell-part profit or loss), etc. For beginner, as a rule of thumb, the smaller the lot size, the better. The reason is, with small lot size, trading risk will be smaller too and it will provide more room to trade other pairs.

General formula to size (a standard account) is [Account balance * (% risk)] = Dollar value of risk. Next, take the range number and times it by ten. This equals the average risk in dollars. The size of the trade = Dollar value of risk /average risk in dollars.

Lets see the example:

The account balance is $1000, trader want to risk 1% of it. So, [$1000 * 1%] = $10.

Next, the market range is 87.2 pips. Then 87.2 *10 = $872

The lot size will be : $10/$872 = 0.01

To understand more about sizing, please check www.apiaryfund.com

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Forex Account Types

In general, there are 3 types of Forex accounts: Standard , Mini, and Micro (Nano) account. It classifies by the leverage provided thus will have an effect on minimum deposit

One lot Standard is worth $100,000. The margin requirement to trade one lot Standard is $1,000. In Standard account, one pip equals to $10. Hence, if in one given day a trader gains 20 pips, it means he makes $10 x 20 pips = $200. In contrary, if he losses 20 pips, it will cost him $200. The capital requirement for Standard Account starts from $5,000.
One lot Mini is worth $10,000. The margin requirement is $100. One pip in Mini is equivalent to $1. Capital requirement for Mini starts from $500. Mini account is usually the more preferable by a new trader or trader who wants to test new strategy, because the potential loss in Mini is one-tenth of Standard Account.
One lot Micro is worth $1,000. The margin requirement is $10. One pip in Micro is about 10c (ten cents). Generally, Micro is a good option new trader who is not familiar with trading, because its potential loss is only one-tenth of Mini account. Not all broker provide Micro (Nano) account. Capital requirement for Micro (Nano) account starts from $25.
Both, Micro and Mini account, are a good option for a new trader, as their potential loss is much smaller than Standard account. Trader must choose the suitable leverage to trade. Experience and sophisticated trader can go with Standard account, while for beginner it’s better go with Mini or Micro account.

In forex trading, capital is crucial, but knowledge is beyond capital. If the trader has skill and knowledge, trader can compound small capital into big one. But, if the trader only depend on large capital he / she has, the money is going to the market in no time. Remember Black Wednesday, 1992 when George Soros beat Bank of England. It is a solid  proof that knowledge is beyond capital.

 

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Forex Trading

Forex trading equals business. Most people say trading is risky, but actually forex trading is similar to other business. Just like forex  trading, starting your own business also have high failure rates (http://www.statisticbrain.com/startup-failure-by-industry/). One of the advantages of Forex trading is I can trade from anywhere as long as there is internet connection, which is very easy to find nowadays. I can control my own time and life, while making money. I take trading very seriously to generate my cash flow.
Trading forex is risky by nature, therefore; it is very vital that one needs to get educated and gain plenty of trading experiences. I took series of education program and am still learning until now. I commit to life-long learning as I believe I need to keep updating and adjusting my trading knowledge and skills to catch up with the market. Then, I experiment trading strategies on my demo account, that I discovered from courses, my reading or other traders’ experiences, to find a strategy that fits my personality and trading psychology. Last but not least, daily trades documentation and evaluation would also be important, so I can learn from my mistakes and sharpen my strategy.
It is not an easy journey. It takes huge effort and time, but I believe it is worth my independence. How about you?

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SWAP

Swap in Currency Market is interest rates for currencies pair that being trade. Interest rate also called daily swap procedure or roll over. Interest rate calculate daily and change on daily base. Interest rate is what make fluctuation in the Currency Market. Investor determine a currency is over price or under price by comparing what investor got in return. When investor hold a certain currency, they may earn the interest or they may pay the interest depend on what currency they hold.
When a country increase the interest rate, the price of the currency will go up, since investor will get more return. In vice versa when a country decrease the interest rate, the price of the currency will go down. In the long term interest rate will show ability and stability of the government to pay the interest.
Forex swap is set by the interest rate difference of two selected currencies (the currencies that still in open positions passed over night time). The interest rate which you can earn during the swap period is used by the broker to calculate the price of the swap. Generally, swap is based on the interest rates of the currency you are trading and the open position. For example AUDJPY; AUD interest rate is higher then JPY interest rate (Aug 2013). If you ‘Buy’ AUDJPY then chance is you are going to earn the swap. If you ‘Sell’ AUDJPY then chance is you are going to pay the swap. But every dealing desk / broker have their own calculation. Please contact your own dealing desk for detail.

 

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SPREAD

Spread is one of the trading costs in the Currency Market. A trader needs to take spread into consideration in order to make profit. Most of people forget to include this factor in their trading plan because they are too focus on the trading strategy and analysis.

Spread is defined as the difference between Selling-price (Bid price) and Buying-price (Ask price). The bid is the price at which forex broker is willing to buy the base currency in exchange for the counter currency. The ask price is the price at which the forex broker is willing to sell the base currency in exchange for the counter currency. Forex broker or dealing desk make their living from spread on each trade position that being place through their network.

spread

The Selling-price (Bid price) always lower then the Buying-price (Ask price). It may cause a trader to lose money, if the trader open and close his position at the almost the same time, with the same exchange rate.

Generally currency pairs with high volatility has tighter spread, while currency pairs with low volatility has wider spread. Apart from wide spread, currency pairs with low volatility usually have a lot of gap in price and is more difficult to identify the trend. For example, USDMXN.

Different dealing desk have different spread for each currency pair. Certain dealing desks write off spread but charge commission for each trade position. Then, there are dealing desks that apply spread and charge commission for each trade position.  Some dealing desk offers fixed spread, but usually the spread is wider than variable spread. The advantage of fixed spread is straightforward profit and stop loss calculation during high volatility. The disadvantage is more costly during normal volatility.  

However, lowest spread does not necessary mean that one dealing desk is a good dealing desk. To choose a good dealing desk or forex broker, one need to consider several factors like : does the company list on certain regulator agency, does the company have a good customer service, does the company have good reviews from their client, where are the offices, etc. How to choose a good dealing desk will be discussed in later article.

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How Does Leverage Work in Forex?

Traders new to the world of foreign exchange often don’t understand the very tool that makes their trading possible: Leverage. Though the concept of leverage has gotten some negative heat in recent years,  it’s one that makes the markets accesible to new traders with little funds!

Leverage is like a short-term loan a broker gives a trader to allow for more buying power. Laws vary around the world, but in the Unites States, brokers are allowed to give traders fifty-to-one leverage. This means that whenever a trader puts $1 into an investment, a broker will match it with $49. This leverage is a great advantage afforded to currencies traders, as it can significantly expand a trader’s profit potential.

Let’s take a quick look at how leverage works:

You see indications that the US dollar is going up in comparison to the Japanese Yen. So you want to purchase 1 regular lot, which is going to cost you $100,000. Your broker, however, has given you 100 to 1 leverage. This means that you can borrow $99,000 from your broker as long as you have at least 1% of the lot size in your account.

Since you were buying at a 1% margin, $1000 US dollars are set aside so that you can open up the trade. You now control $100,000 US dollars worth of Japanese Yen. Let’s assume the exchange rate does indeed rise one cent and you close your position. At first glance this might sound like just a slight increase, but that seemingly insignificant climb earned you a cent for every dollar you had leveraged. You made roughly $1,000 US dollars.

We can simplify this idea by thinking about a home loan. I don’t have the money to buy a $200,000 home outright, but I do have $20,000. I can use that $20,000, or 10%, as a down payment, and the mortgage lender will match it with the remaining 90%. Then, if the house’s value has appreciated in five years, I can claim a profit! However, if the house depreciates to $150,000, not only do I have to take the loss, I still have to pay back my loan.

Amplifying a movement’s effect works two ways; with greater profit potential comes greater risk, so losses can be very large as well. With this in mind, it’s not hard to understand why Apiary teaches strict risk management methods!

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