Forex Trading Basics Tutorial 4 -- Forex Margin Management, Forex Risk Management

Included in this section will be an overview of the basics of Forex trading, along with the concept of daily assessments for evaluating pair prices every day.  Also included are margin management and Forex risk management.

Begin Each Trading Session with a Fresh Perspective

Each day brings something new to learn about market trends, economic news and the latest analytical data available that makes up the learning curve for the foundation of evaluating each side of a currency pair.  The constant movement from either side of currency pair can change the value of it quickly and in large swings.   Good Forex trades will be those that have the greatest chance for movement in the shortest time frame.

Each day will bring new economic data, new time constraints, and new technical charts. A Forex trader should always take in the big picture first in order to keep his or her perspective before immersing themselves into the sometimes huge quantity of data analysis, margins decisions and currency pair choice.  For example, if a trader had a currency pair of AUD/USD that was trading at 1.04 that he made money on a long AUD/USD trade in the past trading session, he should still evaluate the value of the AUD/USD Forex pair as though his previous trades were non-existent.  Using a historical method of trading is useful but not indicative of future market predictions.  To further this example, if the AUD/USD was trading at 1.02, the trader could make a “long” trade in AUD/USD to try repeating his previous gains. Using the logic that if he made a profit at AUD/USD was 1.04, he would certainly repeat it at the new level of AUD/USD 1.02.  If he did this without looking at the data, charts, and economic info of the new trading day, he might miss some important facts that might make the new 1.02 level of the AUD/USD be actually priced in, and therefore its new level for the long term.  If this were the case, then the Forex trader would have to sit on his long AUD/USD trade for a long time before market conditions changed to make the currency pair move to the upside.

Keep in Mind that the FX Prices are New for Each Session

Although the above example of AUD/USD is now at 1.02, the reason behind it may vary.  A technical or fundamental reason could be that the new 1.02 is the beginning of a downward trend.  Trends such as these are important and are something that a trader needs to be aware of.  Another example would be if the Reserve Bank of Australia has changed its interest rates due to the economic conditions in Australia and it went from 3.50 percent down to 3.0 percent.  If held over an extended time frame, the AUD/USD would drop in value, causing the currency pair to have a small chance of moving up to its old 1.04 level in the near future.  Again, traders need to recognize a new trading world each day to get the most benefit out of their portfolios.

In this case, the trader using old information would lose profits simply because he wasn’t up to speed on the latest facts and information available on the currency pair at its new level of 1.02.  Keeping a clear, fresh perspective when starting each new trading day can help a trader use his data to have a lot more good days while minimizing the bad ones.

Managing Margin and Risk Management Techniques                

Professional traders know how to avoid a forced margin call by using proper margin management techniques.  They might typically use 20 percent of their available trading capital to keep their risk in check.  In addition to this, most will have a maximum their total trading margin amount to 33 percent, and rarely go to the  40 or 50 percent margin level (typically for only 10 to 15 minute trading timeframes, or during scalping.)

Knowing how to do this is simple: the longer the time frame, the less capital outlay.   Traders usually use a short timeframe with big amounts of capital.  The other option is that they will seek extended time frames with smaller amounts of capital.  Traders realize that committed capital and margin ratios add risk, therefore, the longer the trade is, the less likely it will unfold as the trader predicts.  A longer term trade that falls apart can be blamed on the international economic and political community at large: stock markets, economic trends, politics, bad data and more.  The daily newsfeeds keeps Forex traders vigilant for worrisome news when long trades are involved.  Putting only 10 percent of buying power up for a long term trade can greatly reduce anxiety if the trade is running for three days or longer.  For a general rule of thumb:  use up to 20 percent for overnight trades, while keeping two or more currency pairs set up for an overnight to total no more than a maximum of 33 percent of available purchasing power on the books at any one trading session.

Also keep in mind suitable high volume trading times: overnight is set from 8PM Eastern Time (ET) to 8AM Eastern time (ET).  Some of the heaviest trading times run 3AM (ET) to 8AM (ET) with the European markets in Zurich, London and Frankfurt being open the same time as the early morning New York City traders.  High volume trading times can mean greater profits as the pairs move more due to higher volumes; at the same time, higher volumes and higher movement can mean higher risk of loss.

Best Trading Times of the Day

If a trader could pick his or her favorite time of day to trade, it would be when time zones overlap, such as the 3AM (ET) to 8AM (ET) because of the increase in activity in the market place with the latest Forex news updates being released to a wider audience.  By far the best time to learn about Forex trading is when the Asian markets are opening, between 6PM (ET) to 11PM (ET).  Asian markets will reflect the news of the day and this is when the bulk of the currencies are traded.  Trading pairs with JPY, AUD, NZD and SGD also increase.

The next section features the basic overview for technical analysis in a Forex application, along with tips on analyzing the chart time perspective and moving averages.


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