It is very important to understand the terminology in the Forex market. That’s way I need your full focus right now! Make your head clear, drink a cup of good coffee and start learning these important terms.
Forex terminology – PIP
You’ve met the PIP yet.
Cute little happy word isn’t it? Well that’s exactly what it is since this cute little word will make you very happy and rich if you use it the right way.
You need to completely understand how to calculate your wins and losses through the PIP.
Otherwise don’t even bother start trading.
The unit of measurement that indicates the change in value between two currencies is what you call a ‘pip‘.
If the EUR / USD pair rises from 1.2250 to 1.2251, then the .0001 USD increases in value 1 PIP. Simply, a pip is the last decimal figure of a quote. Most pairs are shown to four decimal places, but there are exceptions such as the Japanese yen (to two decimal places).
But watch out! There are brokers that show currency pairs different from the standard “4 and 2” decimal, but instead using’5 and 3′ number decimals.
What they actually do is showing fractional pips, “which are also called ‘pipettes.
Forex terminology For example: GBP / USD 1.51542 1.51543 moves, then it rises .00001 1 PIPETTE. As each currency has its own relative value the value of the pip must be calculated for a specific currency pair.
We give an example in which we use a ratio of 4 decimal places. In order to explain the calculations easier we exchange ratio set down like – so: EUR / USD at 1.2500 is “1 EUR / USD 1.2500.
Example exchange rate:USD/CAD = 1.0200; or 1 USD to 1.0200 CAD; or 1 USD/1.0200 CAD.
(The value change in the “counter currency”) X (the exchange ratio) = pip value (in terms of the base currency)
Continuing this example, if we sell 10,000 units USD / CAD, then one pip change of exchange rate changes of approximately 0.98 in the position value (10,000 units x 0.00009804 USD / unit).
We say “approximately” because when the exchange rate changes, the value of each pip move is also changing. Last important question that needs to be answered if you calculate the pip value of your position is: ‘What is the value of your pip in terms of your account currency?’ You’re trading at an international market you remember? So not everyone on the whole world has chosen the same currency for their account.
Shortly, the value of the pip needs to be converted to the currency used at your account.
Forex terminology – Spread.
Simply spread is the difference between bid and ask price. Spread is used by brokers to make money of every trade that takes place through their network. Example: Broker pays 1.3600 and sets the price at 1.3601 for you to buy. Spread will always be around the price the broker paid. Whenever your trade you’ve paid the spread. There is nothing you can do about it. That’s just the way brokers make their money. TIP: search for a website “broker” with the smallest spreads.
⦁ Cross Rate. ( Forex terminology )
The exchange rate between two random currencies that are not considered standard in the country where the pair is quoted. For example: the quote of the GBP/JPY pair would be considered a cross rate in the U.S. While EUR/USD is a cross rate in Japan.
In Forex trading the use of leverage is pretty common. Leverage needs to be completely understood because it plays an important role in the purchasing power of your account.When opening an account you have the option to chose your leverage. It simply gives you the opportunity to trade bigger positions than your real bankroll let’s you.
Just to give you an example:
Suppose you have a thousand euros on your account and you act with a leverage of 10: 1, you can then buy 10,000 EUR / USD. Then, when the price increases on the pair two cents per euro it means that you have earned 200 euros after you close the position. It can also happen that the price of a penny decreases and then you have a loss of two hundred euros when you close the position.Your profit or loss is actually the difference between the amount on your account and the outstanding gains and / or losses.
⦁ Margin. ( Forex terminology )
Margin is the ammount needed to buy a new position. With a margin balance of €1.000,- and a 1% margin requirement you can buy a maximum position of €100.000,- euro. With this given you are able to use a leverage of 100:1.
The higher your leverage the more margin you will need on your account. So, when you open to many positions or your losing position is going further down the balance on your account could be too low to meet your obligations. When this happens your broker will give you a so called “Margin Call”. This means you need more margin (account balance) to hold on to your position. Most of the time when the margin percentage gets under 50% your broker will close that particular position with a loss.
When you decide to trade with big leverages or open a lot positions simultaneously you have to be careful because you don’t want to get that Margin Call.
What type of trader you are? Scalpershold onto for a few seconds to a few minutes at the max. Their main objective is to grab very small amounts of pips as many times as they can throughout the busiest times of the day during the London open or us open or Asia open most loyalty hours from the day.
Day Trades – Beginners
Day Traders usually pick side at the beginning of the day, acting on their bias, and then finishing the day with either a profit or a loss. These kinds of traders do not hold their trades overnight they close every trade the same day.
Swing Traders – Trades For Several Days
Swing traders are for those people that like to hold on to trades for several days at a time. These types of traders can’t monitor their charts throughout the day so they dedicate a couple hours analyzing the market every night to make sound trading decisions this type of traders have a regular job near trading.
Position Traders – Several Weeks, Months, Or Even Years
Position traders are those that have trades that last for several weeks, months, or even years. These traders know that fundamental themes will be the predominant factor when analyzing the markets and therefore make their trading decisions based on them we call them the long term trader.
Want to know more about trading in forex / forex mistakes or do you want to join the forex group? The forex group is mainly in English! Please contact me so that I can explain to you much more about what we have to offer. And all your questions can be verbs.
The truth is a majority of all traders keep losing.
There is a simple explanation: They enter the Forex market with wrong expectations.
They think it’s a getting rich quick system.
Traders like that have the thought by investing a thousand ($1,000,-) they will make $1.000.000 in a week.
That’s just unrealistic.
The Forex market is not a casino.
These unrealistic expectation can and will work against you and will brush your whole account away in a heartbeat.
Again, don’t let emotions get the better of you.
Ask yourself the question: “what am I willing to lose?”
Always have the rule that you can explain why you make a certain decision. Your thoughts have to be robotic and emotionless.
Start trading with money you can lose. / Why majority of all traders keep losing
Since losing money is part of this business.
We can have a good guess what is going to happen in the future but still we can’t predict it for a full 100%.
In the beginning the emotions will probably get the better of you.
You open your account after you’ve red some about Forex and bought your winning system.
You are all excited to become rich and live that lifestyle you’ve always wanted.
At that moment you need to start thinking clear and trust in yourself and always explain to yourself why you made a certain decision.
Don’t get caught up in your dreams like all the other traders do.
Think a head and you will have a bright future!
Let’s take a look at the emotions that influence your trading:
Why majority of all traders keep losing – Doubt:
The worst you can do is doubt yourself.
When you don’t have faith in yourself you start asking other traders or online forums to search for answers that aren’t there.
Remind yourself, your opinion is the one that counts.
Trust your guts and judgement.
Learn to live and love it!
Try not to look at other traders or what their doing. They might have a slight different strategy. For example you are looking for a 5 PIP profit and trying to compare yourself with a trader that is looking for a 50 PIP profit. You see the danger in this?
Every trader has a different experience or a different way of analyzing. What doubt does. It makes you listen and value the opinion or strategy of the other trader more. You stop following your rules and this might very well led to a big loss or even bankruptcy.
“Move on, understand what happened in the past but do not have an emotional attachment to it.”
Why majority of all traders keep losing – Fear:
For beginning traders it’s so easy to have fear. Fear of the market not moving the right direction. After all your playing with real money now. Starting traders with no effective strategy of trading plan should stay away from a real account. Simply because your just gambling and probably don’t know why you are making certain decision. You are just clicking buttons in the hope you win.
Fear can occur after a streak of losing trades. You start doubting yourself again and so no light at the end of the tunnel. Start realizing that a good trader makes 20% losing trades. As I said before. It’s about minimizing you losses and maximize your winning trades!
The Forex market is like any other business, most business aren’t profitable in the first years so don’t expect a miracle starting at the Forex market. However, with the right skills and mindset you can be successful in a few months.
Don’t rush success. It’s like surfing. Learn to ride the waves and fear will be in your past. Once you know how to ride the waves of the market or the sea you have little to no fear to take them on!
Why majority of all traders keep losing – Revenge:
An emotion that is as old as Santa and the pope combined. After a losing trade it’s pretty normal to feel revenge. You want to make up for your losses. People that have been to casino’s before probably know this feeling really well. It’s also just the way our fantastic brain works. To protect yourself keep in mind there is no such thing as a guaranteed winning trade. So don’t take it personal when it is not your fault at all. For example: You’ve just made a trade GBP/USD. You’ve bought a lot USD. An hour later something like 9/11 happens again…. Obviously the position of the USD is going down. Was their anything you could do about this? No! Unless you work fort he CIA or something like this. Than again if you have a job like that you probably shouldn’t focus on trading. Point is. Sometimes there is just noting you can do about it. Why would you be hard on yourself and try to make up for it. That’s the point were emotions are getting involved and you start losing more.
Why majority of all traders keep losing – Greed:
Greed is arguably the most dangerous of all emotions. When you experience an upswing or streak of winning trades it can give you that wonderful feeling that you are the king of the world. The feeling of: I told you so! Maybe you think, oh well, this is just so easy let’s take some more risk. I’ve proven to right all the time in the past. Why would I be wrong this time…? The human brain simly want more and more of that success. This is were you need to stay humble, take your winnings, give yourself o pad on the shoulder and move on to you next winning trade.
Traders have no business trading if risk/reward analysis is not at the top of their concerns.
If a trader has no idea of the potential profit return on any given trade. Relative to the initial risk of taking the trade at all, his long-term profitability is in question.
Risk and Reward Forex
Of course, for every trader, the best case scenario would be to minimize the first and maximize the second.
But how do you get a handle on the potential reward in any investment and the risk you might be taking on?
Risk and Reward Forex
Technical analysis – what’s popularly called charting – can help traders evaluate both risk and reward.
The technical indicators used to read the charts will give you the simplest kind of picture you can get of a currency’s performance.
Simply by placing your support and resistance. And by looking at the past performance of a currency. You can get a record of its closing price over time.
Once all of the elements are in place for an analysis, you can calculate your pips difference and verify.
Depending on the trend of the market, if you will make more profit or loss and if it is after all worth the position.
Risk and Reward Forex
For example, if the market is in a bullish situation, you need to have a higher pips difference. Between your buy-stop order and your resistance price.
Than between your support price and your buy-stop order so that your reward will be maximize and your risk will be minimize.
In each case, upside (bullish) or downside (bearish). The tools of technical analysis will tell you important things about risk and reward. Don’t trade without them.
Once you have the facts it is decision time.
You can choose to do nothing or seek to reduce the exposures or to hedge them in whole or in part.
The unforgivable sins are to fail to consider the risks or fail to act on any decisions.
The risk culture of your business is critical and must be established at the most senior level.
Above all it calls for honesty.
Too often individuals are criticized for decisions that, at the time, were in tune with the organization’s perceived appetite for risk.
But it is never easy to set down effective guidelines and the range of exposures for even a simple transaction can be extensive.
For example, an exporter needing to borrow to finance a sale in foreign currency may have to consider counterparty credit risk, funding risk and interest rate risk.
The permutations are endless and the costs of hedging transactions to reduce or eliminate every possible exposure could potentially swallow any profit from a deal.
How to manage your risk Forex.
While losses are likely to be quantitative, the potentially infinite number of risk combinations means that the skills needed to make good decisions are usually qualitative. Even a computer programmed to consider every conceivable permutation of risks needs to be told what level of exposure is acceptable. Any program is only as good as the parameters and data fed into it by people who have themselves been conditioned by experience.
But what of the improbable.
The wholly unexpected or the never-seen-before?
How to manage your risk Forex.
Effective risk management requires thinking the unthinkable.
This does not in any way lessen the great value of the many sophisticated risk-management systems available.
The problems come if people start to think of them, and the models they are based on, as infallible.
It is also common for the development of control systems to come after any new risk-related products.
Be careful not to bet the business until the exposure is known. To be in business you must make decisions involving risk. However sophisticated the tools at your disposal you can never hope to provide for every contingency.
But unpleasant surprises should be kept to a minimum.
Ask yourself… -How to manage your risk Forex
1- Can the risks to your business be identified, what forms do they take and are they clearly understood? Particularly if you have a portfolio of activities?
2 – Do you grade the risks faced by your business in a structured way?
3 – Do you know the maximum potential liability of each exposure?
4 – Are decisions made on the basis of reliable and timely information?
5 – Are the risks large in relation to the turnover of your business and what impact could they have on your profits and balance sheet?
7 – Are the exposures one-off or are they recurring?
8 – Do you know enough about the ways in which you exposures can be reduced or hedged and what it would cost including the potential loss of any upside profit?
9 – Have trading and risk-management functions or decisions been adequately separated?
Where to place stops – How to manage your risk Forex
We stop out of a trade when we no longer want to hold onto that particular position.
The question that arises is: WHY do we want to get out of that trade?
There can be 2 reasons for stopping out of a trade.
EITHER the market tells us that our intrinsic View or Directional Assessments itself was wrong.
OR we stop out of a trade because we think we can establish another position at a better level than the previous one.
How to manage your risk Forex.
The effort should be to choose a meaningful SL which is neither too close to the entry to get activated soon after entry.
Nor so far away from the entry that we have no time or space left for follow up action.
The difficult part about the paragraph above is that it requires us to have a Trading Plan or Strategy .
And to choose our Entry much more carefully than we tend to do, in accordance with that plan.
How to manage your risk Forex.
Follow through action required we come back to the reasons for wanting to stop out.
In the first case, when our directional reading has been proved wrong.
We should look to enter into a trade in the opposite direction – a case of Stop-and-Reverse (SAR).
It needs to be pointed out here that it is NOT necessary to SAR at the same instance and level all the time.
If you are an intra-week (or longer) trader, you can enter into a reverse trade after stopping out of the original trade.
Allowing yourself time to reformulate your strategy.
How to manage your risk Forex want to know more contact us!
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