Although every investment involves some risk, the risk of loss in trading off-exchange forex contracts can be substantial. Therefore, if you are considering participating in this market, you should understand some of the risks associated with this product so you can make an informed decision before investing.
As stated in the introduction to this booklet, off-exchange foreign currency trading carries a high level of risk and may not be suitable for all customers. The only funds that should ever be used to speculate in foreign currency trading, or any type of highly speculative investment, are funds that represent risk capital ? i.e., funds you can afford to lose without affecting your financial situation. There are other reasons why forex trading may or may not be an appropriate investment for you, and they are highlighted below.
The market could move against you
No one can predict with certainty which way exchange rates will go, and the forex market is volatile. Fluctuations in the foreign exchange rate between the time you place the trade and the time you close it out will affect the price of your forex contract and the potential profit and losses relating to it.
You could lose your entire investment
You will be required to deposit an amount of money (often referred to as a ?security deposit? or ?margin?) with your forex dealer in order to buy or sell an off-exchange forex contract. As discussed earlier, a relatively small amount of money can enable you to hold a forex position worth many times the account value. This is referred to as leverage or gearing. The smaller the deposits in relation to the underlying value of the contract, the greater the leverage. If the price moves in an unfavorable direction, high leverage can produce large losses in relation to your initial deposit. In fact, even a small move against your position may result in a large loss, including the loss of your entire deposit. Depending on your agreement with your dealer, you may also be required to pay additional losses.
Overtrading is another ordinary money management mistake in the forex market. This trading does not have clearly defined trading objectives; the sole reason is to make more money. To avoid this mistake, make sure that every trade is broken into ultimate goals, and that these goals are achieved before other positions are added. Very few traders can successfully manage multiple positions in a variety of currency trading markets.
Overconfidence is a big mistake when it comes to money management and the forex market. This is caused when a trader has or thinks they have particular or inside information. These hot tips are sometimes wrong, and when this happens large amounts of money may be lost because of this. The way to avoid this is to avoid being confident in any rumors or special information you may have. Managing your money means taking measures to preserve it as well.
Preferential bias can exist among forex market traders. This happens when they only see or hear what they want in relative to the favored trade. This can cause a trader to ignore the real activity of the forex market in favorite of what they want to happen. It is important to look at each trade impartially and do not become set in cement with your opinion. Do not ask friends or family for their opinions; just go with what you know.
By using a simple mathematical formula to find the point where the overall trend in price changes, traders can take advantage of the movement of price, either up or down. They can use it as a gauge to determine the direction they should take whether selling a currency that is declining, or buying a currency that is on the rise.
Originally, trading pivot points was limited to floor traders. Its simplicity and straightforwardness made it an attractive tool for floor traders as it allowed them to determine the direction in which the market was heading throughout the day. The formula is simple, with no advanced mathematical skills necessary.
The most common method for calculating pivot points is a simple five point system. This system is comprised of a mathematical formula that utilizes the high, low and close of the previous day, along with two resistance levels and two support levels. The formula is relatively simple:
R2 = P + (H - L) = P + (R1 - S1) R1 = (P x 2) - L P = (H + L + C)/3 S1 = (P x 2) - H S2 = P - (H - L) = P - (R1 - S1)
In this equation, let:
R = resistance levels S = support levels P = pivot point H = high L = low C = close O = open
It should be noted that when calculating the high, low and close, the New York closing time, which is 4 pm (EST) is generally used in Forex and other 24 hour markets.
Keep in mind the order of operations when solving these equations: solve parentheses first, exponents second, multiplication third, division fourth, addition fifth and subtraction sixth.
A variation that is quite common among Forex traders is to include an additional formula to the five point system.
P = ((Today's O) + (H + L + C))/4
There are many websites that feature pivot point calculators. This is good news to Forex traders who are opposed to doing their own calculations. These calculators simply require some information inputted then perform all the calculations to find the pivot point.
Pivot points can actually serve two purposes. They can indicate an overall market trend. A bullish market will break the pivot point price in an upward movement. A bearish market does just the opposite.
But, they are only effective for the one day, making them short term trend indicators. For the following day they must be recalculated. Pivot points are also useful for entering and exiting the market.
Trading pivot points can be a very useful exercise for Forex traders. These few, simple calculations can be done quickly and can show levels that have a great probability for causing price movement.
However, the success of pivot points relies on the trader's ability to use them effectively with other technical indicators such as MACD. When used in conjunction with such indicators, there is an increased probability for success.
Both Rahul Patel & Dave Hikade are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Rahul Patel has sinced written about articles on various topics from Online Forex Trading, Forex Guide. I am Rahul Patel a freelance writer SEO Web Designer with deep interest in . I have written. Rahul Patel's top article generates over 27100 views. to your Favourites.
Dave Hikade has sinced written about articles on various topics from Forex Guide, Investments and Debt Reductions. Dave Hikade began trading over 10 years ago and offers a FREE Forex Trading Newsletter:For more information on Forex Pivot Poi. Dave Hikade's top article generates over 5400 views. to your Favourites.