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, you can build up and control a huge trading position.
Margin is the minimum required balance to place a trade. Forex brokers set their own margin requirements, which typically range from 1-2% of the value of the position.
For example, if you want to trade $100,000 of USD/CHF and the margin required is 1%, or $1000, your margin-based leverage will be 100 times, which is derived by dividing the total transaction value by the margin required.
Many retail forex brokers offer a sizeable amount of leverage to their customers. Some offer 50 times leverage, while an increasing number of them even allow up to 400 times leverage for standard-sized or mini-sized accounts. It is very important to know that leverage magnifies both your profits and losses. The good thing is that you, the customer, are often given the flexibility to select your leverage amount.
Trading
Slippage
Slippage occurs when your order gets executed at a price different from what you were expecting (or hoping). This can easily occur in fast-moving markets, usually during or after some news release, for any non-limit orders.
Liquidity
Even though forex has the greatest liquidity in the financial markets, it does not mean that all currency pairs have the same liquidity. The table below shows the relative liquidity of some important currency pairs.
Volatility
Some currency pairs are more volatile than others. While some pairs can easily move at least 130 pips in a day, other pairs only manage to move less than 70 pips a day.
The figure over the page shows the average daily volatility in some important currency pairs. In this case volatility is measured in terms of pips moved in a day. This is not the conventional way of measuring volatility, which is usually done by measuring the percentage move of a pair in a given time frame. However, since most traders look at the pip move, I am showing volatility in terms of what is most easily measured by traders.
The more a currency pair moves in a day, the greater the chance that profits can be made within a day. Currency pairs which tend to move more than 100 pips a day (for example, GBP/USD and USD/CHF) usually catch the fancy of day traders because they offer the best opportunities for capturing decent-sized profits in a shorter period of time.
The broad spectrum of volatility ensures that there is something to suit everyone, ranging from the aggressive to the conservative trader. The currency pair that you choose to concentrate your trading on will depend on how aggressive or conservative you are.
Common types of order
There is a great range of orders that traders can give to precisely control the execution of their order. Not all brokers will accept the same range of order types, but I list below the most common types of orders that most brokers should accept.
Market Order
An order to buy or sell at the current market price.
Limit Order
An order to buy or sell at a specified price or better.
Stop-Loss Order
An order to close a position if the market price hits a certain level. Note however, that this type of order means that after the stop price is hit the order becomes a market order and you may suffer slippage.
Limit Entry Order
An order to buy below the market or sell above the market at a specified price. You use this type of entry order if you feel that the currency pair will reverse direction from that price.
Stop-Entry Order
An order to buy above the market or sell below the market at a specified price. You use this type of entry order if you feel that the currency pair will continue in the same direction. Just like with a stop order, you may suffer slippage when using this type of order.
Stop-Limit Order
An order to buy above the market or sell below the market at a specified price only. When your price is hit your order becomes a limit order which prevents slippage. However, there is a chance that in a fast-moving market your order won’t be filled at all.
One Triggers Other (OTO)/ Parent and Contingent
A set of orders whereby when the parent order is filled, the contingent order is placed. This is commonly used to make sure a stop and/or limit order is placed as soon as an entry order is filled.
One Cancels Other (OCO)
A set of orders whereby when one order is filled, the other order is cancelled. This is commonly used to set both a profit-taking limit order and a stop-loss order as soon as an entry order is filled.
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