The leverage ratio essentially governs the margin required in an account to trade.

1:100 leverage means for every 100 USD traded, 1 USD margin is required (or 1%). 1:200 leverage, therefore, means for every 200 USD traded, 1 USD margin is required (or 0.5%). Here, a trader can effectively control 200 x more money than what is in the account.

Lots

• A standard lot is 100,000 currency units.
• A mini lot is 10,000 currency units.
• A micro lot is 1,000 currency units.

As an example, one standard lot of EUR/USD is 100,000 euros, while one mini lot of EUR/USD represents 10,000 euros.

Currency pairs consist of two currencies. The euro, in the case of EUR/USD, represents the base currency and the US dollar denotes the quote or counter currency. It is the base currency that’s bought/sold, always representing 1 unit. The quote currency informs traders what the value of the base currency is worth.

If GBP/USD trades at $1.3000, 1 GBP is valued at 1.30 USD. 10 GBP, therefore, would be worth 13.00 USD.

Is Leverage a Loan?

Leverage in the derivatives market, including spot FX, is not a loan from your broker as derivatives are based on agreements. Unlike futures and options contracts, margin FX products traded through MetaTrader cannot be settled by physical or deliverable settlement of currencies – they’re rolled or swapped indefinitely and settled in cash.

In spot Forex, currencies are traded in pairs. If you enter long GBP/USD at $1.2000, you agree to buy GBP and sell USD. Remember, spot FX trades in agreements.

With the above in mind, imagine GBP/USD trades at $1.2900 and the trader enters long 100,000 units, 100,000 GBP are to be received and 129,000 USD are to be delivered within the agreement. Say the pair trades to $1.3000 and the same trader decides to liquidate the position (the agreement), 100,000 GBP is now worth 130,000 USD, a 1,000 USD profit. No currency ever changes hands and no loan is required from the broker.

Margin

Margin is a percentage of your equity put aside by your broker to execute trades. This is to cover the possibility of loss in your account. Margin is not a cost or a fee. This value, used margin, will not fluctuate during a trade. As long as the equity level remains above margin, the account will not hit the broker’s stop-out level.

Free margin is the money in a trading account available for executing additional positions. It’s also the value current position(s) can move against you before the account receives a margin call.

As far as your broker is concerned, your margin requirement will be calculated in your account currency.

• If your account is denominated in USD and the base currency of the pair traded is also in USD, the margin requirement can be calculated by dividing your leverage ratio. For instance, an account set at 1:100 equates to a 1.00% margin requirement (1/100). So, trading one standard lot (100,000 units) equals 1,000 USD margin. Trading one mini lot (10,000 units) equals 100 USD margin.
• If your account currency is different to the pair traded, a different calculation is required. For an account denominated in AUD, though trading EUR/USD, multiply the position value (100,000 units for a standard lot) by the current EUR/AUD price and then multiply this value by the margin percentage (1% in this case). To trade EUR/USD with an account denominated in AUD at current prices you need 1,631.6 AUD margin (100,000 * 1.6316 [EUR/AUD] * 0.01).
• If your account currency is the same as the quote currency of the pair traded, you must multiply the position value (100,000 units if one standard lot) by the current price of the pair traded and multiply this value by the margin percentage, which in this case is 1% (1:100 leverage). Trading EUR/AUD with an account denominated in AUD, with one standard lot, requires 1,630.9 AUD margin to execute a trade (100,000 * 1,6309[EUR/AUD] *0.01).

The Stop-Out Level

Forex brokers seldom call clients to initiate a margin call. However, it is an option in cTrader, a trading platform provided by many popular brokers in the retail foreign exchange industry.

The term you need to focus on is the stop-out level. IC Market’s stop-out level on MT4/MT5 and cTrader is 50%. This means if your equity dips beneath 50% of your used margin level, the platform will automatically liquidate the most unprofitable trades. So, if used margin is 1,000 USD and your account trades to 499.99 USD (49.9%), trades will begin to close. At this point you also have the option of depositing additional funds to increase your margin level.

The accuracy, completeness and timeliness of the information contained on this site cannot be guaranteed. IC Markets does not warranty, guarantee or make any representations, or assume any liability regarding financial results based on the use of the information in the site.

News, views, opinions, recommendations and other information obtained from sources outside of www.icmarkets.com.au, used in this site are believed to be reliable, but we cannot guarantee their accuracy or completeness. All such information is subject to change at any time without notice. IC Markets assumes no responsibility for the content of any linked site.

The fact that such links may exist does not indicate approval or endorsement of any material contained on any linked site. IC Markets is not liable for any harm caused by the transmission, through accessing the services or information on this site, of a computer virus, or other computer code or programming device that might be used to access, delete, damage, disable, disrupt or otherwise impede in any manner, the operation of the site or of any user’s software, hardware, data or property.

The post Forex Leverage and Margin Defined first appeared on IC Markets | Official Blog.

One market in particular that often causes confusion is the spot market.

Commonly referred to as the cash market or physical market, the spot market is a place securities are exchanged for cash and delivered on the spot. The price quoted, the spot price, is the current market value an instrument can be traded – the price an instrument can be bought or sold immediately.

The foreign exchange market is recognised as the largest spot market in the world.

Previously, the foreign exchange market, or Forex market, was restricted to large financial institutions. Thanks to the wizardry of modern technology, however, retail FX trading has grown in popularity.

Nowadays, it’s straightforward for retail traders to open a margin account with a Forex broker. IC Markets allows clients to open an account with as little as 200 USD or currency equivalent, with the application process taking only a few minutes. IC Market’s mission is to provide traders with the lowest spreads and fastest executions possible across more than 285 products including Forex, precious metals, stocks, futures and other commodities.

Exchange Vs. OTC

Spot market transactions can take place on an exchange or over-the-counter (OTC).

• Exchanges are organised physical (and electronic) locations, highly regulated to offer transparency and provide efficient and orderly trading conditions by centralising buying/selling.
• Conducted electronically, an OTC market has market participants trade directly with one another. No exchange or central clearing house exists. Dealers act as market makers, quoting tradable Bid/Ask prices. OTC markets are considered less transparent than exchanges. According to the 2019 Triennial Survey of turnover in OTC FX markets, trading in FX markets reached $6.6 trillion per day in April 2019, up from $5.1 trillion three years earlier. At $2.0 trillion per day, the volume of spot trades in April 2019 was 20% greater than in April 2016[1].

Settlement

A spot transaction refers to an exchange of currencies at the current market rate.

Although the FX spot market means ‘on the spot’ or ‘immediate’, funds are actually exchanged on the settlement date, typically two business days following the agreement, expressed as T+2. Notable exceptions are currency pairs such as USD/CAD, which settle one business day after the trade, T+1.

In order to allow for a seamless trading experience, as most market participants trade for speculation, Forex brokers roll positions forward (at the rollover date) on your behalf and charge a swap. MetaTrader 4 (MT4) FX swaps are calculated on the overnight lending rates in the interbank market, provided to Forex brokers from liquidity providers.

If brokers failed to roll trades, you’d effectively have to buy/sell your existing position every two days. The swap tab highlighted in figure A is where you’ll find your swap credit/debit value for any active trades open longer than one day (past 5pm EST) on your MT4 trading platform.

(FIGURE A)

Apart from Wednesday, your account will, assuming a position is left open after the NY close, either earn credit or be charged a debit (this depends on the interest rates of the currencies traded). Usually, credit is earned if the long currency’s interest rate is higher than the short currency. Similarly, the account may be debited if the interest rate of the short currency is higher than the long currency.

FX brokers apply triple swap on Wednesday because that’s how it’s applied by the banks providing liquidity to the FX market. Remember, FX spot trades usually have a two-day settlement. Triple interest is applied to FX trades at 5pm Wednesday (NY close) as this marks the beginning of a new 24-hour trading day (Thursday) in the global FX market. As the position takes two days to settle, the trade would settle on Saturday when banking institutions are closed, hence the triple interest/charge into Wednesday’s close to cover this.

The accuracy, completeness and timeliness of the information contained on this site cannot be guaranteed. IC Markets does not warranty, guarantee or make any representations, or assume any liability regarding financial results based on the use of the information in the site.

News, views, opinions, recommendations and other information obtained from sources outside of www.icmarkets.com.au, used in this site are believed to be reliable, but we cannot guarantee their accuracy or completeness. All such information is subject to change at any time without notice. IC Markets assumes no responsibility for the content of any linked site.

The fact that such links may exist does not indicate approval or endorsement of any material contained on any linked site. IC Markets is not liable for any harm caused by the transmission, through accessing the services or information on this site, of a computer virus, or other computer code or programming device that might be used to access, delete, damage, disable, disrupt or otherwise impede in any manner, the operation of the site or of any user’s software, hardware, data or property.

[1] https://www.bis.org/statistics/rpfx19_fx.pdf

The post Forex Trading: What is the Spot Market? first appeared on IC Markets | Official Blog.

Countless Forex trading strategies are available, therefore choosing a suitable approach can be a challenge.

What’s a Trading Strategy?

You may have heard maintaining discipline is key to becoming a successful trader. Equally as important, though, is having a well-reasoned and back-tested trading strategy.

A trading strategy is an organisation of rules, covering all aspects of entering and exiting the market. However, this is all but one section of an overall trading plan. A complete plan includes things such as a money-management strategy, a detailed list of currency pairs to focus on, times to trade and risk-management measures.

Trading strategies are based on either technical analysis or fundamental analysis, or a mixture of the two, usually verified through rigorous historical and forward testing. For the purpose of this article, the spotlight will be on the technical side of the market.

Trading Style

Personality and time constraints play a key role in determining which style a trader should explore.

Four main trading styles exist:

• The scalper
• The day trader
• The swing trader
• The position trader

The scalper seeks multiple brief, profitable, opportunities in a day.

If you’re more comfortable predicting the direction a currency pair is headed in the next 10 minutes than you are forecasting direction in the next 10 days, you are perhaps a scalper. Scalping often involves lengthy periods of screen time, difficult for those who have full-time jobs.

Scalpers look to capture, in short timeframes, the first stage of a move or pattern. Further adding to this, scalpers typically have a healthy account size in order to generate worthwhile profits in small moves. As such, the scalper style may not be a suitable approach for every type of trader.

The day trader is a watered-down version of a scalper. Positions are opened during the trading day and are usually liquidated before the market close. The main objective of a day trader is to take advantage of small price movements in highly-liquid markets. The more volatile the market, the more favourable the conditions generally are for a day trader.

Comparing the scalper, who can initiate 10 or more trades in a day, Forex day trading activity may only consist of one or two trades each day, using timeframes ranging from the 5-minute up to a 15-minute scale (a scalper will likely be focused on the 1/3-minute timeframes). Day trading requires healthy patience and generally long periods at the screen in order not to miss favourable trading patterns or potential breakouts. Again, not a style one should be looking at if you have full-time obligations.

Both the scalper and day trader tend to be driven by daily results.

The swing trader is considered a patient individual, content that trades may last for several hours, a few days or even a few weeks. Unlike scalping or day trading, this style suits those who have full-time jobs and those who dislike the idea of several hours behind the screen.

Most swing traders think long term, focusing on quarterly results. According to swing traders we’ve interviewed, swing trading alleviates the pressure to make money on a daily or weekly basis.

Swing traders also tend to enjoy the analytical side of trading on slower timeframes (H1 charts and higher), using a mix of high-probability patterns and indicators.

The position trader, on the other hand, thinks long term, similar to an investor. If you’re a position trader you may look at the screen once a day. Most, however, will open their platforms only a couple of times a week to check on current trades, or execute fresh positions.

Trades in this category tend to last long periods of time (months or even years in some cases if the conviction is strong). Short-term movement carries little weight in the eyes of a position trader.

Trend Following Trading Strategies

On most price charts, it is clear price action trends.

It is trending movement trend followers look to identify and exploit.

Numerous methods exist in this category, with some standing the test of time.

Moving averages are one of the more commonly used indicators in the trend-following community. In the right hands, these tools are powerful.

The two most popular moving averages are the simple moving average (SMA) and the exponential moving average (EMA). The simple moving average is calculated by adding the closing prices of an instrument, and dividing this total by the number of time periods. This is the mean value. The exponential moving average, although similar to the simple moving average, houses a subtle difference: more weight is given to the latest data in the calculation. Accounting for this, exponential moving averages tend to react faster to price movement.

Moving averages provide a simple, yet effective, way of measuring trend. At its most basic, should the instrument trade beneath a selected moving average, this signals the primary uptrend may be weakening and an opportunity to join a downtrend could be on the cards. The same applies to a price shift above a moving average, only here we’d be looking to join a possible uptrend, as opposed to a downtrend.

Below are typical settings traders use to engage with the market:

• 10/15-SMAs are popular with scalpers and day traders to identify short-term trends.
• 50-SMAs are typically used to gauge mid-term trends. Think the swing trader here, H1 and H4 timeframes.
• The 200-SMA is favoured among longer-term traders. Think position trader here.

Figure A demonstrates how traders track price movement using a simple moving average on the H4 timeframe (EUR/USD), resulting in possible opportunities to trend trade. In this instance, we used the 50-SMA to gauge mid-term direction. As you can see, things quickly become tricky when the market enters a consolidation phase (right-hand side of the chart), therefore best to try and avoid these types of markets.

Figure A

Alongside trend identification, moving averages are also used as a means of entry confirmation. Having two moving averages crossover can provide reliable buy and sell signals.

Long-term traders tend to opt for a 200/50 period setting, while shorter/medium-term traders target lower settings in the range of 50/20. When the shorter-term moving average crosses above/below its longer-term counterpart; a signal to engage is presented.

Figure B, on the EUR/USD M15 timeframe, shows a (50) simple moving average (red) along with a (20) simple moving average (blue). The green arrows denote potential entry signals where the (20) moving average crosses its longer-term equivalent. However, like all things technical in the trading domain, nothing is guaranteed to work 100% of the time. Note the fake signal to sell short, circled in red. It can get particularly frustrating when multiple back-to-back false signals are generated, normally seen in a ranging environment.

Another aspect to bear in mind is the spread between moving averages: the further apart they are, the stronger the trend is likely to be.

Figure B

Price action trend following techniques have also become popular over the years. As an uptrend progresses, resistance levels are consumed and often become active support once retested (the same for a downtrend, only support levels are consumed and used as resistances). Just to be clear, identifying key support and resistance levels takes time to master.

As in figure C, price respects the support-turned resistance level but failed to continue lower. Instead, the unit responded from nearby demand. This will happen at times. You have to learn to roll with it and trust your trade-management approach.

Figure C

Not a Standalone Strategy – Confluence

Trading based solely on a moving average crossover is unlikely to work in the long term. Using them with additional tools is recommended, referred to as trading confluence.

For example, imagine a scenario where you’ve managed to pin down a strong support level that boasts historical significance. Now imagine a firm break of this level taking shape that’s shortly after followed up with a retest. This, combined with price trading below your selected moving average or together with a moving average crossover, could be a strategy by and of itself. Two components are effectively working together to validate shorting opportunities – remember keeping it simple is key. Don’t make the mistake of overloading charts with indicators, this is likely to lead to analysis paralysis.

As for stop-loss placement, either beyond the support/resistance level, or beyond the moving average, are popular options. Another use a moving average offers is determining where to take profit when trailing a position. As the trade progresses and the moving average alters course, you can adjust your stop position behind the moving average as price moves in favour (a trailing stop).

The accuracy, completeness and timeliness of the information contained on this site cannot be guaranteed. IC Markets does not warranty, guarantee or make any representations, or assume any liability regarding financial results based on the use of the information in the site.

News, views, opinions, recommendations and other information obtained from sources outside of www.icmarkets.com.au, used in this site are believed to be reliable, but we cannot guarantee their accuracy or completeness. All such information is subject to change at any time without notice. IC Markets assumes no responsibility for the content of any linked site.

The fact that such links may exist does not indicate approval or endorsement of any material contained on any linked site. IC Markets is not liable for any harm caused by the transmission, through accessing the services or information on this site, of a computer virus, or other computer code or programming device that might be used to access, delete, damage, disable, disrupt or otherwise impede in any manner, the operation of the site or of any user’s software, hardware, data or property.

The post Forex Trading: An Introduction to Trading Strategies and Trading Styles first appeared on IC Markets | Official Blog.

According to the 2019 Triennial Survey of turnover in OTC FX markets[1], the US dollar retained its dominant currency status, on one side of 88% of all trades. Additionally, more than 60% of foreign exchange reserves are denominated in dollars, according to the International Monetary Fund (IMF)[2].

Traditional major currency pairs also include the US dollar. On top of this, the greenback is the standard currency in the commodity market and therefore directly impacts commodity prices.

What Is the US Dollar Index?

The majority of traders understand how support and resistance levels are applied on charts and also know how to read technical indicators, such as the relative strength index (RSI). Another tool that deserves mention, however, is the US dollar index.

Developed in March 1973 by the United States Federal Reserve, the US dollar index, or more commonly referred to as the ‘DXY’ (ticker symbol used by Bloomberg’s Terminal) or ‘USDX’, is a measure of the value of the US dollar against a basket of six major currencies.

In terms of weighting, the euro (EUR) controls the largest percentage share at approximately 57.6%. This is followed by the Japanese yen (JPY) at 13.7%, the British pound (GBP) at 11.9%, the Canadian dollar (CAD) at 9.1%, the Swedish Krona (SEK) at 4.2% and the Swiss franc (CHF) at 3.6%.

Since its inception, the index achieved all-time highs at 164.72 and lows as far south as 70.69. If you’re familiar with standard stock indices, such as the Dow Jones Industrial Average, the S&P 500 and FTSE 100, the DXY operates similarly, only using currencies as opposed to equities.

Using the DXY

The DXY provides a way of measuring USD strength.

• Currency pairs with the US dollar representing the base currency (the first currency in a pair’s quotation – USD/CHF, for example) may be an attractive buy if the DXY is oversold. Similarly, selling these markets is appealing if the DXY is overbought.
• If, on the other hand, the USD represents the quote currency (the second currency in a pair’s quotation –EUR/USD or GBP/USD), buying these currency pairs may be appealing if the DXY registers overbought conditions. And, similarly, traders may consider selling these markets if the DXY puts forward an oversold reading.

Each trader is different, and will have a different idea of what constitutes oversold and overbought conditions.

Those who favour supply and demand, a popular approach involving price action, will note supply drawn on the DXY held price lower at point 1, in figure A. Selling off from this area denotes a USD overbought condition, serving as a warning signal. Therefore, would you be bullish the greenback at point 2? No.

(Figure A)

If we know the dollar is likely to turn lower at point 2 on the DXY, prudent traders may look to bid currency pairs containing a USD quote currency. The EUR/USD (figure B), for example, offered a trading opportunity to buy demand on its second retest, converging with supply on the DXY.

(Figure B)

As demonstrated in figure C, you can also use trend line studies between the DXY and currency pairs to determine USD overbought/oversold conditions.

Figure C is a reasonably simple chart. On the right, the US dollar index displays trend line support. The last test of the trend line would have had traders drawn to USD-base currency pairs for possible long trades. The left side of the chart shows USD/JPY trading off trend line support at the same time. Given the convergence, a USD/JPY bid would have been high probability.

(Figure C)

Other Tools

You can use any tool you feel offers the clearest perspective in terms of overbought and oversold conditions on the DXY. It does not have to be supply and demand or trend lines.

Knowing where the DXY is positioned is important. It adds weight to trade setups.

Feel free to experiment with different technical tools. You might find technical indicators are more suited to identify DXY overbought/oversold conditions, rather than price action.

The accuracy, completeness and timeliness of the information contained on this site cannot be guaranteed. IC Markets does not warranty, guarantee or make any representations, or assume any liability regarding financial results based on the use of the information in the site.

News, views, opinions, recommendations and other information obtained from sources outside of www.icmarkets.com.au, used in this site are believed to be reliable, but we cannot guarantee their accuracy or completeness. All such information is subject to change at any time without notice. IC Markets assumes no responsibility for the content of any linked site.

The fact that such links may exist does not indicate approval or endorsement of any material contained on any linked site. IC Markets is not liable for any harm caused by the transmission, through accessing the services or information on this site, of a computer virus, or other computer code or programming device that might be used to access, delete, damage, disable, disrupt or otherwise impede in any manner, the operation of the site or of any user’s software, hardware, data or property.

[1] https://www.bis.org/statistics/rpfx19_fx.pdf

[2] https://data.imf.org/?sk=E6A5F467-C14B-4AA8-9F6D-5A09EC4E62A4

The post The Importance of the US Dollar Index first appeared on IC Markets | Official Blog.

In a nutshell, derivatives are agreements between buyers and sellers.

Derivatives specify a future price at which an asset can be sold, known as the underlier. This could be a physical commodity, such as corn, wheat or natural gas, or a financial security, such as stocks, bonds and foreign exchange.

Derivatives are widely employed across financial markets – below are the most common.

Forward Contract

A forward contract is a straightforward over-the-counter (OTC) product, obligating one party to buy the underlier and the other party to sell, for a set price on a specified date in the future.

The party with an obligation to buy holds a long position; the party with an obligation to sell holds a short position.

The core objective of a forward contract is to mitigate uncertainty; both parties lock in a price for future settlement.

As an example, imagine a pear farm produces one million pears at harvest. Each year, the price of pears fluctuates. This leaves our pear farmer with a problem. Sometimes pears sell for $0.30 each, while other times the price of pears are below $0.10, resulting in a loss for the farmer.

On the other side of the equation, you have a bakery chain, specialising in pear custard pies. When the price of pears advance, the bakery shops struggle to cover costs, but a lower price brings with it strong returns.

Evidently, neither party like the unpredictability.

The solution could be a forward contract, an agreement ahead of time to transact at a specific price. On one side, the bakery chain agrees to buy a certain number of pears at a specified price, let’s say $0.20 per pear. This works out well for the bakery chain as regardless of what the market price ends up being in the future, the forward contract ensures they pay $0.20, enough to make profits with predictability. Equally, this works out well for the pear farmer as he knows at $0.20 per pear, he covers costs and generates a return, while removing the unpredictability factor.

Futures Contract:

A futures contract is viewed as a standardised forward contract, executed on a public exchange.

A $3 box of cereal generally remains the same price week-to-week, despite wheat prices changing daily. How does the cost of cereal stay stable, in spite of the crops used to manufacture the product fluctuating in price? This is partly thanks to the futures market.

Buyers and sellers trade bushels in the futures market, though physical wheat seldom changes hands. Instead, parties buy/sell contracts, considered risk management – a hedge against the change in price.

Futures contracts gain or lose value in the futures market.

If the cereal manufacturer plans to buy 50,000 bushels of wheat in six months and the company wants to lock in a price, it may execute ten wheat futures contracts with a delivery price of $5. Each contract guarantees the delivery of 5,000 bushels of wheat in six months for $5 per bushel. Therefore, the cereal manufacturer can expect to pay $250,000 for its wheat.

Six months later, wheat prices rise to $6. This means the total value of the cereal manufacturer’s position on 50,000 bushels, with an original delivery price of $5 per bushel, would rise by $50,000. At this stage, the cereal manufacturer can buy 50,000 bushels from its regular supplier at the current market price of $6 per bushel, or $300,000. The total price of the purchase, however, is $250,000, the desired price due to the $50,000 futures gain.

Options Contract:

Two of the most common types of options are calls and puts.

Calls give the buyer, or holder, the right, but not the obligation, to buy an underlying asset at the strike price detailed in the option contract. Options investors buy calls if they’re bullish and sell calls when bearish.

Puts, on the other hand, give the buyer the right, but not the obligation, to sell the underlier at the strike price stated in the contract. The seller, or writer, of the put option is obligated to buy if the put buyer exercises their option. Investors buy puts when they’re bearish and sell puts if bullish.

By way of an example, Nigel the investor trades stocks and options after work.

He believes the stock of XYZ Corporation, trading at a price of $40, is likely to advance over the next several months. Rather than purchase the shares of the company outright, Nigel buys six-month call options at $40. The option contract gives Nigel the right, but not the obligation, to purchase XYZ for $40 anytime over the next six months.

Six months later, XYZ trades at $42. Nigel exercises his option and buys XYZ for $40, realising a gross profit of $2 per share.

Contract for Difference (CFD):

One of the most popular and innovative investment tools is a CFD, or contract for difference. The CFD market allows participants to trade on the price movements of a number of financial markets, such as Forex, stocks, commodities and indices.

If you believe the price of an underlying asset will advance, you can purchase, or go long, a CFD contract and benefit from the price rise. Alternatively, should you feel the underlying asset will decline, you can sell a CFD, or go short, and benefit from the price drop.

CFDs, put simply, are agreements between buyers and sellers to exchange the difference between the opening price the trade was executed at and the liquidation price.

When you buy a CFD agreement, you do not pay the full notional value of the position, only a fraction, otherwise known as the margin. This practice is called trading on margin or margin trading.

With CFDs you do not own the underlying asset, you’re simply trading an agreement.

Key Similarities and Differences

• Most options and futures contracts are settled either as cash settlement or physical delivery. Unlike futures or options, there is no delivery of physical goods or securities with CFDs.
• A futures contract is essentially a standardised forward contract executed at a public exchange. The terms of a forward contract can be privately negotiated, a tailor-made contract, if you will.
• CFDs are an over-the-counter (OTC) agreement between buyers/sellers, while the majority of futures and options contracts are standardised and trade through public exchanges.
• A futures contract requires a buyer to purchase the underlier and a seller to sell at the expiration date, unless the contract is closed before. An options contract, on the other hand, gives an investor the right, but not the obligation, to buy (or sell) underlying assets at the expiration date.
• CFD contracts generally do not expire, while futures and options contracts have clear expiration dates.
• Futures, options and CFDs are all tradeable on margin.
• There are fewer regulations when it comes to CFDs. Futures and options contracts are highly regulated.

The accuracy, completeness and timeliness of the information contained on this site cannot be guaranteed. IC Markets does not warranty, guarantee or make any representations, or assume any liability regarding financial results based on the use of the information in the site.

News, views, opinions, recommendations and other information obtained from sources outside of www.icmarkets.com.au, used in this site are believed to be reliable, but we cannot guarantee their accuracy or completeness. All such information is subject to change at any time without notice. IC Markets assumes no responsibility for the content of any linked site.

The fact that such links may exist does not indicate approval or endorsement of any material contained on any linked site. IC Markets is not liable for any harm caused by the transmission, through accessing the services or information on this site, of a computer virus, or other computer code or programming device that might be used to access, delete, damage, disable, disrupt or otherwise impede in any manner, the operation of the site or of any user’s software, hardware, data or property.

The post What Are Derivatives: An Introduction first appeared on IC Markets | Official Blog.

Mars Bars in the UK cost 29p in 2000, though cost 60p today.

The median annual earnings for full-time employees in the UK was approximately £30,000 in 2019, while in 2000 employees took around £19,000[1].

This is largely due to inflation. Currency is simply worth less than what it was years ago.

The Foreign Exchange Market

Trading in foreign exchange (FX or Forex) reached $6.6 trillion per day in April 2019, up from $5.1 trillion three years earlier, according to the 2019 Triennial Survey of turnover in OTC FX markets[2]. With a daily turnover in excess of $6 trillion, the FX market has no equal in the world of international finance.

Average daily trading volume for US government treasury trading, according to SIMFA (Securities Industry and Financial Markets Associations), is approximately $600 billion. 2018 recorded $547.8 billion, with an increase of 8.4% in 2019 to $593.6 billion[3].

The average daily trading volume on the New York Stock Exchange (NYSE), the largest stock market in the world, fluctuates between 2 and 6 billion shares. The latest daily trading volume, according to The Wall Street Journal, is $1,506,569,251 for the primary market[4].

What is Inflation?

According to the US Federal Reserve:

Inflation is the increase in the prices of goods and services over time. Inflation cannot be measured by an increase in the cost of one product or service, or even several products or services. Rather, inflation is a general increase in the overall price level of the goods and services in the economy. Federal Reserve policymakers evaluate changes in inflation by monitoring several different price indexes. The Federal Open Market Committee (FOMC) judges that an annual increase in inflation of 2 percent in the price index for personal consumption expenditures (PCE), produced by the Department of Commerce, is most consistent over the longer run with the Federal Reserve’s mandate for maximum employment and price stability. The FOMC uses the PCE price index largely because it covers a wide range of household spending. However, the Fed closely tracks other inflation measures as well, including the consumer price indexes and producer price indexes issued by the Department of Labour[5].

Inflation is considered by many as too much money chasing too few goods.

What this means is if there’s too much currency in the economy then the money’s worth is diluted.

Consumer price inflation is the release that generally frequents newswires, taking a weighted average of typical household products.

What Causes Inflation?

The two major types of inflation in the economy are cost-push inflation and demand-pull inflation.

Cost-Push Inflation may arise due to the overall increase in the cost of production.

Cost of production could rise as a result of an increase in the prices of raw materials and wages.

Demand Pull Inflation is a rise in demand relative to supply.

Some economists attribute this rise in demand to money supply. If the supply of money in an economy exceeds available goods and services, demand pull inflation exists.

The Effect of Inflation on FX Markets

Foreign exchange rates and inflation share a connection, influencing one another.

High inflation can prompt central banks to increase interest rates in attempt to slow the economy down. An increase in interest rates may also spark interest in the respective country’s bond market, consequently increasing the need for that country’s currency. If demand for the currency is extensive, a rally would take place.

Low inflation, however, encourages central banks to lower interest rates in a bid to resuscitate the economy, fundamentally making money cheap to promote spending and investment. Investors, in this case, may find returns are no longer satisfactory. This can lead to investors moving funds to a country offering a more lucrative return, placing downward pressure on the weaker country’s currency.

A weak US dollar, for example, also helps exports. As the currency drops, the cost to foreign consumers falls which usually results in purchasing more products. This generates higher profits, production, employment and output. Increased output can lead to inflationary pressures. A stronger dollar can, of course, have the opposite effect.

With respect to central banks, say the US Federal Reserve, a hawkish stance implies the central bank wants to guard against excessive inflation, in support of the raising of interest rates. A dovish stance put forward by the central bank, on the other hand, generally favours economic growth and employment over tightening interest rates.

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[1] https://www.statista.com/statistics/1002964/average-full-time-annual-earnings-in-the-uk/

[2] https://www.bis.org/statistics/rpfx19_fx.pdf

[3] https://www.sifma.org/resources/research/us-bond-market-trading-volume/

[4] https://www.wsj.com/market-data/stocks/marketsdiary

[5] https://www.federalreserve.gov/faqs/economy_14419.htm

The post The Foreign Exchange Market and Inflation first appeared on IC Markets | Official Blog.

To trade the forex market successfully, understanding the dynamics behind how trades are measured is a necessity.

Currency Pairs

A base currency is the primary currency in a currency pair quotation – the euro in EUR/USD, for example. The quote currency, or counter currency, is the US dollar, the second currency in the quotation.

Should you enter long (buy) EUR/USD, you buy the base currency and sell the counter currency; it’s always the base currency of the two currencies that is bought or sold. The quote currency is in place to determine the value of the base currency.

Some forex brokers display quantity in lots; others express size in currency units.

A Trading Lot

Trading lots vary between four key units.

A standard lot is the equivalent to 100,000 units of the base currency.

A mini lot, 10% of a standard lot, is the equivalent to 10,000 units of the base currency.

A micro lot is the equivalent to 1,000 units of the base currency – popular with newer retail traders.

A nano lot is the equivalent to 100 units of the base currency, also common among newer traders with smaller account sizes.

The question then arises, is it necessary to have $10,000 in the account to trade 1 mini lot? No. This is where leverage comes in.

Leverage

Leverage is defined as having the ability to control larger sums of capital using little of your own funds. Contrary to popular belief, leverage in spot foreign exchange does not involve borrowing any money from the broker.

For every $1 in your account you can control $X amount where X is greater than 1. 100:1 leverage, for example, means you can control $100 for each $1 in your account. If you have $1,000 in your account, you have the ability to control $100,000 in positions.

You must also recognise what margin is. Margin is the amount of money a broker requires you to commit to cover potential future losses on a trade, before a position can be opened.

This article explores leverage in depth and highlights why leverage is not a loan in FX.

Position Sizing

Position sizing is an important aspect, and can make or break a trader if not understood. Traders are risk managers, first and foremost.

Depending on the currency pair traded and account denomination, additional steps may be required.

Account denomination set the same as the counter currency:

Account currency: $10,000

Currency pair: EUR/USD

Stop distance: 50 pips

Calculate risk to the account, which in this case is 2% (10,000 * 0.02 = $200).

Divide the amount risked ($200) by the stop-loss order distance to find the value per pip ($200 / 50 = 4 [a value of 4$ each pip]).

The final stage involves multiplying the pip value by the fixed unit value for EUR/USD.

If your trading account currency is in USD and the USD is listed as the second in a pair, the unit value of lots remain unchanged: $0.10 per pip for a micro lot (1,000 units), $1 per pip for a mini lot (10,000 units) and $10 per pip for a standard lot (100,000 units).

Therefore, you can use the following calculation:

$4 each pip * 10,000 units (mini lot) = 40,000 units of EUR/USD – 4 mini lots using a 50-pip stop distance.

Using a micro lot in the calculation, the position size is less, 4,000 units, or $0.40 per pip, equating to $20 risk over 50 pips.

Using a standard lot, trade risk is too high at 400k units, or $40 per pip – a risk of $2,000.

Account denomination set the same as the base currency:

Account currency: EUR 10,000

Currency pair: EUR/USD

Stop distance: 50 pips

Calculate risk to the account, which in this case is 2% (10,000 * 0.02 = EUR 200).

Convert the EUR value to USD as the value of a currency pair is calculated by the counter currency. The EUR/USD exchange rate, in this example, is $1,1280.

Multiplying $1.1280 by EUR 200, the trade risk, gives approximately $225.60. This is the USD risk equivalent on the trade, as of the current exchange rate.

Next, divide the USD risk by the stop-loss distance, 50 pips: (USD 225.60) / (50 pips) = $4.51 per pip.

Finally, multiply the value per pip by the lot value.

$4.51 * (10,000/1) = approximately 45,000 units – 4 or 5 mini lots, depending on risk appetite. Or 4 mini lots and 5 micro lots. This is based on a 50-pip stop distance.

Account denomination differing from both the base and quote currency:

Account currency: USD 10,000

Currency pair: EUR/GBP

Stop distance: 50 pips

Calculate risk to the account, which in this case is 2% (10,000 * 0.02 = USD 200).

To find the correct position size, you need to find the value of risk in GBP. Remember, the value of a currency pair is in the counter currency. To convert the risk amount from USD to GBP, you need the GBP/USD exchange rate.

In this example, GBP/USD trades at 1.29011. You then multiply the trade risk $200 by the inverted exchange rate (1 GBP / 1.29011 USD) = 154.00 risk in GBP.

Convert GBP risk to pip value by dividing by the stop-loss distance in pips: (GBP 154.00) / (50 pips) = GBP 3.08 per pip.

Finally, multiply the value per pip by the lot value:

3.08 * 10,000 = 30,800 units – approximately 3 mini lots.

Knowing the above, the trader can sell no more than 31,000 units of EUR/GBP, with a 50-pip stop distance, to stay within the pre-determined risk parameters set in USD.

Forex Calculator

Make life easier.

While knowing the dynamics behind how trades are calculated is important, consider using our pip value calculator. This takes most of the leg work out of the calculation, giving you the freedom to focus on trading.

The post What Are Lots in the Forex Market? first appeared on IC Markets | Official Blog.

Learn to take losses. The most important thing in making money is not letting your losses get out of hand – Marty Schwartz

Accepting loss to gain trading consistency is an interesting paradox.

Every good trader endures loss. The difference between a successful trader and failure is understanding how to handle loss. Whether we choose to accept it or not, losses are an integral part of trading.

Newer traders often fall victim to revenge trading – an occurrence involving the attempt to win back losses, often brushing aside risk measures and logic. Others try to disregard losses altogether, trading through the pain.

Both approaches, regardless of the trading strategy, cause emotional frustration and will inevitably drain your account.

A Trading Plan

Losses are not the problem, it’s the absence of a well-defined trading plan that is.

Having a plan helps guide traders on points such as risk management, money management and entry and exits signals. The trading strategy, included within the overall plan, that details entry/exit rationale, should have gone through rigorous testing prior to trading live.

Experienced traders put their strategies through comprehensive tests, verifying which approach works best in which market. This gives them the confidence to trade with live funds and not feel threatened by losses.

If you’re unsure how to build a trading plan, check out this comprehensive article.

Is Placing a Trade Accepting Risk?

Placing a trade is not accepting risk – placing a trade is taking risk. Two entirely different things.

Trading, contrary to popular belief, is not a right/wrong profession.

The moment a trade is placed, traders often expect gain, only giving lip service to the possibility of loss, or risk. This is a mistake, leading to frustration and, ultimately, further loss.

Accepting the possibility of a trading loss, prior to executing the trade, is the objective here. By recognising the likelihood of loss, altering trade levels while the position is live would not occur. Risk – your stop-loss order – is calculated and acknowledged before taking the trade, accomplished through an objective state of mind unclouded with emotion, according to your overall trading plan.

Recovering After a Larger-Than-Expected Loss

A large loss can be devastating, not only financially but emotionally, too.

Following a trading plan helps avoid this occurrence, though it can still happen to the best of us.

Protective stop-loss orders, while they’re there to protect capital, do not necessarily always limit loss to the price level selected. If a stop-loss order is triggered during a major market event – this does not have to be a crash, it can be any tier-1 economic release that surprises enough – the stop becomes a market order, though depending on market conditions available bids/offers may be limited. This means you’ll be filled at the next available price, which could be much further than you initially anticipated. These type of stop orders are called sell/buy stops.

What about stop-limit orders? As their name implies, there’s a limit on the price at which they execute. You essentially inform your broker the price you accept. There are two prices specified in a stop-limit order: the stop price, which will convert the order to a sell/buy order, and the limit price. Instead of the order becoming a market order, it becomes a limit order that will only execute at the limit price or better. However, there is no guarantee this order will be filled, particularly if price is rising or falling rapidly.

Experiencing a larger-than-expected loss affects different people in different ways.

It’s important to take some time and let the loss sink in. You need to come to terms and accept the loss. Once you’re in a better place you can think about analysing why the loss occurred. Did you follow the trading plan? Was every angle covered? Is there something you could do in the future to avoid this reoccurring?

Only when you feel ready, consider trading a small account to rebuild that confidence you once had. However, you don’t want to be paralysed with the fear of losing, but at the same time the position size can’t be so small your mind doesn’t take trading seriously.

Accept Responsibility

Trading loss, as highlighted at the beginning of this article, is part of the business.

Accepting responsibility is vital. Most of us overlook this. Instead of taking responsibility for a bad trade, we blame everything but ourselves. It’s the market, the broker, the charting service, etc.

It’s your analysis and your account. Put your loss, as long as it’s a controlled loss, in perspective and move on. Assuming you’re trading a tested strategy, thinking in probabilities helps combat the individual effect losses have.

Experience traders lose a pre-determined amount they are comfortable with and accept it as an unavoidable part of trading. They move on to the next trade, knowing their overall strategy, through testing and track record, is profitable over the long term.

Get Comfortable Being Uncomfortable

To become successful as a trader, you must put yourself into situations that will bring loss. This is part of your job as a trader. You are actively competing against the most powerful forces in your body: the unconscious and subconscious. You are quite literally fighting yourself and most of the time.

The takeaway from this entire article is, in order to succeed in trading, you need to learn to be comfortable accepting the possibility of loss on any one trade.

If you enjoyed this article, check out this piece. It lists 5 must-read trading psychology books worthy of any trader’s bookshelf.

The post Accept Losses and Become a Consistent Trader first appeared on IC Markets | Official Blog.

The problem is new traders fail to recognise the significance of a trading plan. This may address why many traders find it difficult to accomplish their goals in this business.

A trading plan, be it fundamental or technical analysis, is a comprehensive body of rules, designed to cover each aspect of your trading. It is your business plan. Included within the trading plan is a trading strategy, a framework to enter and exit the markets along with risk and money-management rules.

Having a trading plan helps reduce the emotional impact. Emotional traders typically bypass rational behaviour, leading to impulsive and foolish decisions.

Know thyself

Before a trading plan is designed, it’s important to understand the reasons behind why you want to become a trader or an investor.

Is it financial rewards, a career change and the freedom it can offer, additional retirement funds or is it you simply have an interest in the financial markets? Whatever it is, knowing why helps determine what type of trading style and, ultimately, trading plan, to adopt.

An example might be someone looking to top up their retirement fund, though lacks the time to trade intraday. In this case, position or swing trading, trading styles that place emphasis on longer-term swings, might be an approach to consider.

Important elements needed to shape a successful trading plan

Overall market risk:

The staple behind any trading plan places strong emphasis on risk and money management principles.

Overall market risk is the pre-determined maximum permissible capital at risk at any one time.

An example is an account with overall market risk set to not exceed 4% of the total account equity. Two open trades with a risk of 2% hits the risk ceiling. Four open trades risking 1% also reaches the threshold.

What about if a trade’s risk is at breakeven? Technically speaking, risk is never reduced until the position is liquidated. However, unless a major event causes the market to gap, breakeven stops are generally honoured, therefore. opening another trade is mostly acceptable, though is trader dependent.

Protective stop-loss placement:

While the practice of employing protective stop-loss orders is sometimes questioned, many support the use of a stop and should, therefore, be included in your trading plan. It helps contain risk.

Although the stop value must adhere to your maximum overall permissible risk (see above), it should also be positioned as and where your strategy dictates.

For instance, a long (buy) trade at the top edge of a demand area, an approach based on price action, traditionally states that protective stop-loss orders are best suited a few points south of the zone.

Risk/reward:  

The risk/reward ratio measures how much your potential reward is, for every dollar you risk. A risk/reward ratio of 1:3 means you’re risking $1 to potentially make $3. A risk/reward ratio of 1:5 means you’re risking $1 to possibly make $5. This is an incredibly important aspect of a trading plan’s risk profile.

Determining the risk/reward ratio of your trading strategy, however, means little without understanding the win/loss ratio – the win/loss or success ratio is a trader’s number of winning trades relative to the number of losing trades.

Suppose a strategy’s average risk/reward is 1:5, meaning a risk of 20 points gains 100 points. In isolation, you’d be hard pressed to find a trader on the planet pass on these stats. Yet, what if this strategy managed to achieve these gains only 15-20% of the time? Although a marginally profitable strategy, it doesn’t boast the appeal it once did. Without the win/loss ratio taken into account, it’s impossible to understand a strategy’s potential, in terms of risk/reward.

The bottom line is to ensure your method has a positive expectancy, the amount we expect to make for every $ of risk we take. It is the return we can expect over the long run.

Knowing when enough is enough:

Having the discipline to know when to stop trading is good risk management, and a skill often overlooked. It helps avoid revenge trading, an emotional response to recover losses, and helps curb greed. For that reason, it might be an idea to incorporate the following rules in your trading plan:

• Profitable trading day – target achieved. Sign off and shut down the computer.
• Maximum permissible daily loss of 2% reached. Sign off and shut down the computer.
• If no setups are present, trying to create one is seldom a good idea. In this case it’s best to sign off and do something else.

Hardware risk:

Should your computer malfunction whilst in a trade or your internet suddenly trips out, do you have a plan in place to deal with this?

An easy way to overcome this is have an additional (back-up) internet connection and invest in a mini portable generator. Further to this, always have the telephone contact details of your broker nearby.

Money management:

Trading capital should always be money you can afford to lose, period. If you drain the account, it should make little difference to your current standard of living.

In the event of a large drawdown, what plan do you have to help manage this? A trading plan should include a cut-off point. For example, if your overall account equity drops below 25%, all trading should seize until you recognise the cause(s) behind the drawdown. This helps eliminate the risk of a margin call.

Position size:

Having set your overall market exposure, the size of your position should never surpass this value. Being disciplined and sticking to your noted risk parameters is crucial. It doesn’t matter how much conviction you have in a particular setup, it can still fail. Position sizing, therefore, is a vital component that deserves the utmost respect.

Trading strategies

Trading strategies, a framework to enter and exit the markets, vary dependent on the trader. Despite the differences, each trading plan must display definite rules of engagement for both entry and exit signals. This defines the setup.

A setup is a repetitive pattern that provides a high-probability signal to trade. Whilst recommended to note each rule in detail, a simplistic approach is often best. The last thing you want to do is scrutinise long-winded notes before entering a trade.

Having an edge, a technique, observation or approach that creates an advantage, that has been back tested enhances your odds of success in the live markets, assuming you have the discipline to follow the trading plan.

It is also quite common for traders to have more than one strategy. Although having alternative methods has benefits, newer traders may want to consider focusing on one approach to begin with.

Market selection

At some point in your trading plan you must decide which markets to trade. Ideally, these are the instruments you back tested your strategies on. It is also advisable to focus on only one or two markets to begin with, such as, currencies and commodities. This helps avoid overtrading.

Trading times

If you’re trading strategy involves breakouts, being active during the London/US sessions is likely best as this is the time we typically see liquidity enter the markets. On the other side of the coin, a range trader may look at trading during times when liquidity is lower, such as the Asian session.

Note the times required to be at the trading desk, and adhere to it. This might only be an hour a day for some. The idea behind this is to help stop overtrading, instil discipline and merge your trading business into everyday life.

The strategy, along with your allotted trading times and market selection, are crucial elements that have an important role to play in a trading plan. Failing to respect these rules makes trading a difficult endeavour.

Goal setting

Having something to strive for is an essential part of your trading plan. It is how we develop and ultimately progress. Goal setting is a component that not only focuses on financial objectives; it should also look at developmental goals as well. Some examples of developmental goals might be:

• Sticking to your setup’s rules and not deviating.
• Respecting risk and money management principles.
• Adhering to your set trading times.

By focusing on becoming a skilled and disciplined trader, the financial rewards will follow.

Trading goals are best structured throughout the year, setting annual, quarterly, monthly and weekly objectives. An example of an annual goal could be to improve your trading knowledge by reading books on psychology or a particular area you struggled with last year. Additionally, you may want to note your expected yearly return here, too.

Some traders do not set weekly, monthly or even quarterly financial goals. They find setting realistic annual percentage goals less stressful, effectively working with time on their side. Weekly, monthly and quarterly goals are probably best suited to developmental objectives.

What can a trading plan do for you?

The purpose of this article was to highlight fundamental components needed in a trading plan.

You may have a strong trading strategy, boasting a high win rate, but without correct risk and money management principles defined within the overall trading plan, you’ll likely still lose money.

To wrap up, the following lists some of the reasons why a trading plan is beneficial and why it is required to successfully operate in the market:

• Without a trading plan, the act of trading becomes frustrating, stressful and a pointless exercise. Following a plan helps employ discipline and structure.
• Takes away much of the decision-making process – the trading setup is either present or it’s not. When live funds are on the line, a trading plan helps maintain a certain amount of equanimity and keeps you from making illogical and often impetuous mistakes.
• Gives you the ability to monitor your progress, identify mistakes and alter the trading plan accordingly. Keeping a trading journal helps.
• Allows financial and developmental goals to be clearly defined.
• Identifies the markets you wish to engage in.
• Produces a clear understanding of risk and money management principles.
• Organises times of trade.

The post How to Build a Forex Trading Plan: A Compilation of Parts 1-4. first appeared on IC Markets | Official Blog.