Share Market

Leverage is a tool, and like all tools it can be used prudently or not. For example, many investors believe that owning shares in a major commercial bank is a prudent investment. But how do commercial banks generate profits? A typical commercial bank’s mandate can be defined as an “absolute return strategy using a portfolio of debt securities leveraged 10-to-1 or more, where the investment style seeks to realize a consistent spread on the assets in excess of the cost of leverage.”

There are numerous ways leverage is defined in the investment industry, and there is no consensus on exactly how to measure it. Leverage can be defined as the creation of exposure greater in magnitude than the initial cash amount posted to an investment, where leverage is created through borrowing, investing the proceeds from short sales, or through the use of derivatives. Thus leverage may be broadly defined as any means of increasing expected return or value without increasing out-of-pocket investment.

There are three primary types of leverage:

1. Financial Leverage: This is created through borrowing leverage and/or notional leverage, both of which allow investors to gain cash-equivalent risk exposures greater than those that could be funded only by investing the capital in cash instruments.

2. Construction Leverage: This is created by combining securities in a portfolio in a certain manner. How one constructs a portfolio will have a significant effect on overall portfolio risk, depending on the amount and type of diversification in the portfolio, and the type of hedging applied (e.g., offsetting some or all of the long positions with short positions).

3. Instrument Leverage: This reflects the intrinsic risk of the specific securities selected, as different instruments have different levels of internal leverage (e.g., $100,000 invested in equity options versus $100,000 invested in government bonds). While the use of leverage is central to the hedge fund industry, hedge funds vary greatly in the degree and nature of their use of leverage. Leverage allows hedge funds to magnify their exposures and thus magnify their risks and returns. However, a hedge fund’s use of leverage must consider margin and collateral requirements at the transaction level, and any credit limits imposed by trading counterparties such as prime brokers. Therefore, hedge funds are often limited in their use of leverage by the willingness of creditors and counterparties to provide the leverage.

Hedge funds’ use of leverage, combined with illiquid positions, whose full value cannot be realized quickly,can make them vulnerable to “liquidity shocks” in the event of significant margin calls. While banks and securities firms often have trading desks with positions similar to those of hedge funds, these institutions have liquidity sources and other income sources that can minimize their vulnerability to liquidity shocks.

Steps. Choose an online Forex Firm

What to look for in an online Forex Firm:

1. Low Spreads.

In Forex Trading the ‘spread’ is the difference between the buy and sell price of any given currency pair. The lower the spread saves the trader money. Most firms offer 4-5 pip preads in the Major Currency pairs. The best firms offer clients 3-5 pips.

2. Low minimum account openings.

For those that are new to trading, and for those that don’t have thousands of dollars in risk capital to trade, being able to open a mini trading account with only $200 is a great feature for new traders.

3. Instant automatic execution of your orders.

You want instant execution of your orders and the price you see and ‘click’ is the price that you should get. Don’t settle with a firm that re-quotes you when you click on a price or a firm that allows for price ‘slippage’.This is very important when trading for small profits.

4. High Leverage

You want high leverage—the ability to trade a large amount with a small margin deposit. Some of the best firms offer .25% or 400:1 leverage.

5. Hedging Capability

You want the flexibility of opening positions on the same currency pair in opposite directions without them eliminating each other and without margin increase!

Steps: When to Enter and Exit Your Trades:

We will be looking at 3 different ways to day trade the Forex Markets. In a trading session, you may look for 1 or more of these approaches.

The 3 techniques are as follows:

1. Trade the Breakout

2. Trade the Trend

3. Trading Tops and Bottoms

When is the best time to trade?

Because the Forex Market is open 24hrs a day, and traded on a global scale, the question to ask is, ‘when should I trade?’. The good news is that no matter what time zone or hemisphere you live in globally, there are always good opportunities to trade.

The three major trading ‘sessions’ are as follows (all in Eastern Standard Time):

1. New York open 8:00 AM to 4:00 PM

2. Japanese/Australian open 7:00 PM to 3:00 AM

3. London open 3:00 AM to 8:00 AM

Often, the best times to trade is at the beginning 3-5 hours of the above mentioned opening times, because the major currency pairs tend to move the most in a particular direction.

Before you attempt to trade currencies, you should have a firm understanding of currency quoting conventions, how forex transactions are priced, and the mathematical formulae required to convert one currency into another.

Currency exchange rates are usually quoted using a pair of prices representing a “bid” and an “ask.” Similar to the manner in which stocks might be quoted, the “ask” is a price that represents how much you will need to spend in order to purchase a currency, and the “bid” is a price that represents the (lower) amount that you will receive if you sell the currency. The difference between the bid and ask prices is known as the “bid-ask spread,” and it represents an inherent cost of trading the wider the bid-ask spread, the more it costs to buy and sell a given currency, apart from any other commissions or transaction charges.

Generally speaking, there are three ways to trade foreign currency exchange rates:

1. On an exchange that is regulated by the Commodity Futures Trading Commission

(CFTC). An example of such an exchange is the Chicago Mercantile Exchange, which offers currency futures and options on currency futures products. Exchange-traded currency futures and options provide traders with contracts of a set unit size, a fixed expiration date, and centralized clearing. In centralized clearing, a clearing corporation acts as single counterparty to every transaction and guarantees the completion and credit worthiness of all transactions.

2. On an exchange that is regulated by the Securities and Exchange Commission (SEC).

An example of such an exchange is the NASDAQ OMX PHLX (formerly the Philadelphia Stock Exchange), which offers options on currencies (i.e., the right but not the obligation to buy or sell a currency at a specific rate within a specified time).

3. In the off-exchange market.

In the off-exchange market (sometimes called the over-thecounter, or OTC, market), an individual investor trades directly with a counterparty, such as a forex broker or dealer; there is no exchange or central clearinghouse. Instead, the trading generally is conducted by telephone or through electronic communications networks (ECNs).

Tip 1-You should be fully aware of the power of a position. Never arrive at a market judgement while you have a position.

Tip 2 – Ascertain a stop and a profit objective before you enter a trade. Place stops based on market info, and not your account balance. If a proper stop is too costly, it isn’t worth it to go ahead with the trade.

Tip 3 – Remember not to add to a position that is losing. Averaging don’t work in forex trading.

Tip 4 – Trading systems that work efficiently in an up market need not work in a down market. Always keep this in mind.

Tip 5 – If you decide to exit a trade that means you are capable of perceiving changing circumstances. Never think you can pick a price, exit at the market.

Tip 6 – In a bull market you should never sell a dull market and in a bear market you should never buy a dull market

Tip 7 – Sell the factual news and buy the news that you hear Tip 8 – Up trending, range bound and down trending are three types of markets and you should have a different trading scheme for each of them.

Tip 9 – When everyone else is in, time is up for you to get out.

Tip 10 – Never enter a new trade in the direction of a gap and never let the market make you make a trade.

Tip 11 – It helps for you to read the previous day chart each day to get an idea of what the market already did. It will definitely remind you about the trend and patterns that happened yesterday.

Tip 12 – Never change your unit of trading unless under a plan of attained goals. It helps to have a plan for lessening size when your trading is cold or market volume is down.

Tip 13 – Never continue trading non stop even when you are on a winning streak.

Take your profit for the day and then stop trading can preserve your winning.

Tip 14 – Flexibility is an essential element of successful day trading. You should do your homework so as to understand the full potential for both sides of the market.

This will enable you to make your trades on the basis of what the market is doing at the time of the trade.

Tip 15 – Never worry about a missed chance. There is always another one waiting for you.

Tip 16 – If you convert a scalp or day trade into a position trade that means you did not take into account the risks involved in the trade properly.

Tip 17 – There is no meaning in looking for secrets in the market. You will only find matters that no one cares about.

Tip 18 – Asking for someone else’s opinion is not advisable because they probably did not do as much homework as you did.

When 95% of traders lose money, what makes you think you can win? To see your chances of succeeding as a forex trader, here is a checklist for you to see and become one of the elite traders, who make tremendous long term profits.

Following are a few ways to lose money. You may wish to change your mind immediately if you are thinking of trying any of them. Do this to avoid losses and continue your forex education!

1. Following a Forex Robot with Simulated Gains – You can apparently achieve success without any effort as promised by these. You are asked to accept their track records simulated going backwards. Your equity will get destroyed by trying them.

2. Day trading and Scalping – Due to the random short term volatility, simply doesn’t work.

Like the robots, even people selling these always have simulated track records.

Many more of these all fall into the category of trying to find someone else to give you success. This does not work in forex markets.

Apart from needing a trading edge, you also have to understand ways and reasons of it leading you to success. Let’s look at this in detail.

Success Comes From Within

The combination of a simple robust helping you to understand and trade with discipline is what forex trading is about.

You need to know what you are doing to trade with discipline. This translates into having confidence, which you definitely don’t get from someone telling you what to do. You get confidence by from your own knowledge and learning.

Discipline & Losses

As you have to keep executing trading signals through losing periods, discipline is hard. This has to be continued till you hit a home run, even when the market is fooling you and taking your money.

A Trading Edge

What separates out your forex trading system from the 95% losers is your trading edge. You can answer what is your trading edge and how will it help you beat the majority. You don’t have one if you don’t know what it is.

Few succeed in the simple looking forex trading. These elements are present in the winners’ forex trading strategy:

Using simple robust forex trading system

– Having solid grounding in the basics of forex trading

– Knowing exactly why their system will lead them to success

– Having confidence and discipline to stick with their plan

– Knowing only they are responsible for their Forex trading success

You have to stand alone, be confident of your actions and be disciplined to follow your plan in forex trading.

Success is in YOUR Hands

Sounds simple, however it is actually depends on your approach to forex trading – with the right mindset and getting right education. The trader beats himself, rather than the market beating the trader in forex trading.

Learn the basic fundamentals, get a suitable system, become confident, get an edge and be disciplined. Do all of these to enjoy currency trading success

The off-exchange forex market is a large, growing and liquid financial market that operates 24 hours a day, 5 days a week. It is not a market in the traditional sense because there is no central trading location or “exchange.”

Most of the trading is conducted by telephone or through electronic trading networks.The primary market for currencies is the “interbank market” where banks, insurance companies, large corporations and other large financial institutions manage the risks associated with fluctuations in currency rates.

The true interbank market is only available to institutions that trade in large quantities and have a very high net worth.

In recent years, a secondary OTC market has developed that permits retail investors to participate in forex transactions. While this secondary market does not provide the same prices as the interbank market, it does have many of the same characteristics.

Forex transactions are quoted in pairs because you are buying one currency while selling another.The first currency is the base currency and the second currency is the quote currency.

The price, or rate, that is quoted is the amount of the second currency required to purchase one unit of the first currency. Currency pairs are often quoted as bid-ask spreads. The first part of the quote is the amount of the quote currency you will receive in exchange for one unit of the base currency (the bid price) and the second part of the quote is the amount of the quote currency you must spend for one unit of the base currency (the ask or offer price).

In other words, a EUR/USD spread of 1.2170/1.2178 means that you can sell one Euro for $1.2170 and buy one Euro for $1.2178.

A dealer may not quote the full exchange rate for both sides of the spread. For example, the EUR/USD spread discussed above could be quoted as 1.2170/78. The customer should understand that the first three numbers are the same for both sides of the spread.

How do I close out a trade?

Retail forex transactions are normally closed out by entering into an equal but opposite transaction with the dealer. For example ,if you bought Euros with U.S. dollars you would close out the trade by selling Euros for U.S. dollars.

Most retail forex transactions are governed according to a settlement date when the currencies are to be delivered. If in case you want to keep your position open beyond the settlement date, it is important that you roll the position over to the next cycle. Some dealers roll open positions over automatically, while other dealers may require you to request the rollover. On most open positions, interest is earned on the long currency.

Forex system happens to be the greatest global trade. It taps into some movements for businessmen to gain well. One accepted Forex business agenda utilized rather gainfully in the business is called Channel Breakout.

Forex Trading Channels – Channels consist of paths made on a schedule to trace the array where exchange had been transacted in a time span. They can be simply constructed. Observe the schedule in a time span and draw lines linking the comparatively tall spot business expenses, and down under linking a comparative low spot business expenses. This will give you a picture of the business array existent during a time span like, six months.

Channel Breakout – Once the value of exchange goes up the peak network line, there is a rising network getaway. Also, once the value goes down below the lowest network spot, you get a downward network getaway. Network getaways happen upwards and downwards. With enough Forex input with scientific scrutiny, everyone may utilize the process for getting a gainful exchange business agenda.

You have to build the channels very carefully. Every meeting of lines doesn’t indicate a proper getaway. If there is any fallacy in the line construction, what you observe is business out of the array, which just leads you back inside. Therefore, before anything else, gain enough knowledge on Forex. Gainful Control of Forex channels – When you figure out the working of networks, gains will happen. Construct the business with enough pauses. Then, in case of an incorrect getaway sign, you will get tolerable losses or if luck favors you, a very low profit.

But if you are on the correct side of a proper network getaway, the tiny lack you received will be moved away and you get a good big satisfactory gain.

Any proper Forex business shareholder worth his name capitalizes on channel breakouts. In case you want to cash in the exchange markets, take out a certain amount of time for a Forex education to build this agenda and various technological scrutiny processes.

That will build up the exchange agendas, which would yield gainful consequences. If you don’t give some time to completely figure out the stakes and yields contained in a Forex business agenda, you may not get the desirable consequences. So you see, your gain just depends on you.

In the forex (FX) market, rollover is the process of extending the settlement date of an open position. In most currency trades, a trader is required to take delivery of the currency two days after the transaction date. However, by rolling over the position – simultaneously closing the existing position at the daily close rate and re-entering at the new opening rate the next trading day – the trader artificially extends the settlement period by one day.

Rollover is the interest paid or earned for holding a currency spot position overnight. Each currency has an overnight interbank interest rate associated with it, and because forex is traded in pairs, every trade involves not only 2 different currencies but also two different interest rates. However, unlike what many traders think, foreign exchange rolls are not based on central bank rates. Instead, forex rolls are constructed using forward points which are mostly based on overnight interest rates at which banks borrow unsecured funds from other banks.

Often referred to as tomorrow next, rollover is useful in FX because many traders have no intention of taking delivery of the currency they buy – rather, they want to profit from changes in the exchange rates. At the close of every trading day, a trader who took a long position in a high yielding currency relative to the currency that he or she borrowed will receive an amount of interest in his or her account. Conversely, a trader will need to pay interest if the currency he or she borrowed has a higher interest rate relative to the currency that he or she purchased.

Where should one invest?

Even though, making carry trades has been less appealing over the last few months, the currency market is still one of the best places to invest. After all, the forex market is still the most liquid financial market in the world with an average daily volume of US$ 4 trillion, according by the Bank for International Settlement. This is more than three times the total amount of the stocks and futures markets combined. Moreover, with a no-dealing-desk forex broker, every trade is executed with one the world’s premier banks which compete to provide you with the best bid and ask prices. This competition between banks reduces the potential for market manipulation by price providers.

Globally, operations in the foreign exchange market started in a major way after the breakdown of

the Bretton Woods system in 1971, which also marked the beginning of floating exchange rate regimes in several countries. Over the years, the foreign exchange market has emerged as the largest market in the world. The decade of the 1990s witnessed a perceptible policy shift in many emerging markets towards reorientation of their financial markets in terms of new products and instruments, development of institutional and market infrastructure and realignment of regulatory structure consistent with the liberalised operational framework. The changing contours were mirrored in a rapid expansion of foreign exchange market in terms of participants, transaction volumes, decline in transaction costs and more efficient mechanisms of risk transfer.

The origin of the foreign exchange market in India could be traced to the year 1978 when banks

in India were permitted to undertake intra-day trade in foreign exchange. However, it was in the 1990s

that the Indian foreign exchange market witnessed far reaching changes along with the shifts in the

currency regime in India. The exchange rate of the rupee, that was pegged earlier was floated partially in March 1992 and fully in March 1993 following the recommendations of the Report of the High Level Committee on Balance of Payments (Chairman: Dr.C.Rangarajan). The unification of the exchange rate was instrumental in developing a market-determined exchange rate of the rupee and an important step in the progress towards current account convertibility, which was achieved in August 1994.

A further impetus to the development of the foreign exchange market in India was provided with the setting up of an Expert Group on Foreign Exchange Markets in India (Chairman: Shri O.P. Sodhani), which submitted its report in June 1995.The Group made several recommendations for deepening and widening of the Indian foreign exchange market. Consequently, beginning from January 1996, wide-ranging reforms have been undertaken in the Indian foreign exchange market.

After almost a decade, an Internal Technical Group on the Foreign Exchange Market (2005) was constituted to undertake a comprehensive review of the measures initiated by the Reserve Bank and identify areas for further liberalisation or relaxation of restrictions in a medium-term framework.

The momentous developments over the past few years are reflected in the enhanced risk-bearing capacity of banks along with rising foreign exchange trading volumes and finer margins. The foreign exchange market has acquired depth. The conditions in the foreign exchange market have also generally remained orderly. While it is not possible for any country to remain completely unaffected by developments in international markets, India was able to keep the spillover effect of the Asian crisis to a minimum through constant monitoring and timely action, including recourse to strong monetary measures, when necessary, to prevent emergence of self fulfilling speculative activities.

Money management is a critical point that shows difference between winners and losers. It was proved that if 100 traders start trading using a system with 60% winning odds, only 5 traders will be in profit at the end of the year. In spite of the 60% winning odds 95% of traders will lose because of their poor money management. Money management is the most significant part of any trading system. Most of traders don’t understand how important it is.

It’s important to understand the concept of money management and understand the difference between it and trading decisions. Money management represents the amount of money you are going to put on one trade and the risk your going to accept for this trade.

There are different money management strategies. They all aim at preserving your balance from high risk exposure.

First of all, you should understand the following term Core equity Core equity = Starting balance – Amount in open positions.

If you have a balance of 10,000$ and you enter a trade with 1,000$ then your core equity is 9,000$. If you enter another 1,000$ trade, your core equity will be 8,000$

It’s important to understand what’s meant by core equity since your money management will depend on this equity.

We will explain here one model of money management that has proved high annual return and limited risk. The standard account that we will be discussing is 100,000$ account with 20:1 leverage . Anyway, you can adapt this strategy to fit smaller or bigger trading accounts.

It’s very important to understand these 2 strategies.

The size of your trade should be adjusted so that you risk 5$/pip. With 20:1 leverage, your trade size will be 50,000$

If the trade is stopped, you will lose 1,000$ which is 1% of your balance.

This trade will require 2,500$ = 2.5% of your balance.

This is just an example. Your trading balance and leverage provided by your broker may differ from this formula. The most important is to stick to the 1% risk rule. Never risk too much in one trade. It’s a fatal mistake when a trader lose 2 or 3 trades in a row, then he will be confident that his next trade will be winning and he may add more money to this trade. This is how you can blow up your account in a short time! A disciplined trader should never let his emotions and greed control his decisions.