miércoles, 28 de febrero de 2018

Meet Some Forex Divas

Meet Some Forex Divas


Are you still worrying that forex trading may not be suitable for women? Here is what female traders from around the world have been saying about their experience with forex.

MAIKO, FOREX TRADER FROM JAPAN

Q: When did you start trading?
A: In 2007, when the carry trade was at a peak.
Q: Why did you start forex trading?
A: My friends were trading, so I started.
Q: What is your educational background in college or high school?
A: I graduated from a university in the United States with a bachelor of science.
Q: How did you learn about forex trading?
A: Online, by trial and error.
Q: What percent of your expendable money do you invest in forex?
A: Approximately 10 to 15 percent. I also do not plan to invest more than 15 percent in the future because I have learned that I should not trade (invest) more than I can risk.
Q: What is the most that you have earned trading forex?
A: My total gross profit was once close to 1 million JPY.
Q: What is the most you have lost trading forex?
A: I lost 0.5 million JPY in one night. When I woke up in the morning, my account had been liquidated and all of my positions were automatically closed. I think I was way too overleveraged at that time.
Q: Does being a forex trader boost your self-confidence among your friends? How about at home?
A: I feel that I am always up-to-date with news and economic events because I am a forex trader. That is something that I can be positive about!
Q: Do you ever trade with your female friends? How about with your husband or boyfriend?
A: I trade alone because I want to stand by my own trading rule and strategy. Trading is an individual responsibility. I mean that I should be solely responsible for the outcome. It can get nasty if I lose a trade or enter or exit a market too soon or too early by listening to others. I do not want to get feisty with friends or a partner!
Q: How do you spend the money you earn from forex trading?
A: I cannot recall a specific luxury item that I purchased with money earned from forex. But when I win a trade, I buy fancy desserts or drinks!

KATHY LIEN

Let me introduce you to one of the giants of the forex industry, who despite her young age has already published four books on this topic. Yes, I said “her.” This is a she. Now, I’m not expecting you to write books on this topic or make appearances on Bloomberg TV and CNBC all the time, like she does. I just want to set her as an example of a successful female forex trader. Yes, ladies, we can!
So without further ado, I bring to you an original Forex Diva, Kathy Lien.
Kiana: When did you first become interested in forex trading?
Kathy: Trading in general, I started when I was in college. There were a lot of different investment training programs when I went to NYU. So I started to become interested in the markets at that time, and during my college career, I actually participated in the Market Technicians Association. My mentor and the person who gave me my first internship when I was in college was a technical trader, so he got me kind of tuned into how the stock market worked and how to look at charts and made me much more aware of technical analysis. That’s how my interest in trading started to grow. But I didn’t really become interested in forex trading until I graduated from college. When I was in college, we had the “dot-com” boom, and day trading of stocks was extremely popular. When I graduated, I joined J.P. Morgan, and it placed me in the foreign exchange trading group. I knew very early on that I wanted to be in a trading program in an investment banking program. So J.P. Morgan placed me in the foreign exchange group, and that is where my career in foreign exchange started, because I joined the desk, I met the traders, and I got the insiders’ view of how the market works. I spent a couple of years there and learned how to trade not only FX but also the derivatives of FX, like FX options and interest-rate derivatives, which all kind of relate to the same thing because they are all based on the same story about whether the central banks are going to raise or cut the interest rate and how the economies are doing. So we basically traded many products. To sum it up, trading came from my first internship in college and forex trading came from my first job out of college.
Kiana: You first learned about technical analysis at the Market Technicians Association?
Kathy: I was an intern for one of the directors and the director took me to a lot of the meetings, so I learned a lot through that. On a day-to-day basis, he would teach us how to look at the markets from a technical basis.
Kiana: Now that you trade every day, what is your trading style?
Kathy: I have two styles of trading. But they are both in the center of what I call medium-term trading. Usually I look at whole positions for a couple of hours or couple of days. I have search strategies that I use on a shorter term, and I have search strategies that are more positional. Usually during the daytime, between about 6:30 and noon, I’m looking more for shorter-term trades. And then in the afternoon, usually 3:30 to 5:30, I look at my positional trades that I hold overnight.
Kiana: How do you come up with your trading strategies?
Kathy: My trading strategies are all based on a combination of fundamental and technical analysis. But some of the core trading strategies that I have come from back-testing. The trades that I take are centered around a technical strategy, and I demo trade it, I live trade it, and then I usually take the trades that have a fundamental catalyst. And that is how I combine my fundamentals and my technicals.
Kiana: What are the steps that you take before entering a position?
Kathy: In terms of my positional trades, I first watch the markets throughout the day. So the most important thing is to understand the momentum of the markets—whether we are in an environment where there is a consolidation or whether we are in a trending environment, and whether the market is closing strong or closing weak. That is the first criterion that I move on for trading.
My second criterion is looking at the event risk calendar. I see if there is a piece of economic data that is going to push the trade in my direction. For example, let’s say I want to do an AUD/USD trade. What I’ll do is look for whether or not there is a piece of Australian data coming out, like the Australian GDP. If there is a piece of Australian data coming out, I’ll look at my general fundamental studies to help me determine whether I think the data are going to be strong or weak. If my belief is that the data are weak, we have a negative momentum in the markets, and I have a technical setup that I’m looking for that is also negative, I have three stars lined up: I have the general sense of the market in my direction, I have a possible data catalyst that might push it further in my direction, and then I have a general technical picture in which I use double Bollinger Bands to see whether the trend is in that direction. When these three things are lined up, that is when I decide whether or not to take a trade.
Kiana: Do you believe in intuition in your determination?
Kathy: I think intuition always plays a role. It is basically always a guess: the right guess versus the wrong guess. You are hoping that the reason you are taking this trade is that there are enough factors that have lined up to support the guess that you are making. I think intuition definitely plays a role because you have to have a good feel for a possible trade and have enough confidence that there is room for that trade to move in your direction.
Kiana: How exactly do you manage risk?
Kathy: I have clearly defined stops and limits, and I stick to them. I don’t deviate from the stops and limits that I have originally set. There is a lot of blood, sweat, and tears put into the entry and exit of all of my strategies. A lot of back-testing has been done on the exit strategy and on the entry strategy. So given that all that work has been done already, now I just follow these strategies and stick to the risk and reward parameters that I have laid down before the trade. I never adjust my stops at all. It’s always a flat stop and that’s it. I think that is the biggest mistake that traders make: once the position starts to move against them, they adjust their stops. The only thing that I may do is to use trailing stops once I’m in profit, but I never adjust my stops to give a trade more room.
I think it’s fear that causes people to move their stops. Let’s say the stop is at 50 pips. When they are down 40 pips, they think, maybe I should move this to 60 pips or 70 pips just to give it a little bit of room. I would never do that.
Kiana: What are your thoughts on leverage?
Kathy: Leverage is a double-edged sword. I actually trade on less leverage. 10:1 is probably the maximum leverage that I use in terms of my overall account size.
Kiana: Have you ever traded at a higher leverage?
Kathy: I have, of course. Especially when I was starting out. The 50:1 leverage was extremely attractive. But I think as time passes, you become more disciplined. My approach to FX has changed as well, and I realized that in order to survive in this market for a long period of time, it is important that you approach it no differently from the way you approach stock trading. This is not a get-rich-quick type of market. Because if you think like that, you are going to get poor very quickly as well. I think it’s important not to be greedy and to be satisfied with double-digit return rates, which is already really good. Some people can’t even get single-digit returns.
Kiana: How do you react when you realize that you have made a mistake in your position or analysis?
Kathy: There are only one or two things that I would do. I always stick to the stop, but sometimes, when the trade is not working out as I would like, I may take profits early. I won’t necessarily adjust myself if I don’t feel comfortable with the position and it’s not really moving the way that it should be. I trade momentum, so in a set period of time, if it’s not really moving in my direction, I may choose to exit early.
Kiana: What is the indicator that you use when you say that you trade momentum?
Kathy: It is not so much an indicator. You obviously could use indicators to gauge momentum, but for me, it is more the prevalent sentiment in the market, and that really comes from watching the market and the prices.
Kiana: How do you decide which currency to trade?
Kathy: It’s based on my trading strategies. The setups are there. I use double Bollinger Bands a lot. Let’s say I want to trade the Australian dollar and I want to short Aussies, then I would look to see which Aussie pair has my technical setup. I have the strategy that I use, which I have established and have been using for years. Then I look at the calendar to see if there is a piece of economic data coming out. I may have a strong opinion on the GDP numbers coming out every week. And if I have a strong opinion on the GDP numbers, I may be looking to short Aussies. Then I’ll have my indicator—double Bollinger Bands—set up on my charts, then I will look to see which pairs are giving me a solid signal. It may be AUD/USD, AUD/JPY, AUD/CAD, and so on.
Kiana: Do you recommend that people start trading together the way you did with Boris at GFT?
Kathy: I actually think it helps a lot. If you have a trading buddy, it makes a very big difference, because being able to bounce ideas off someone else is basically a quality check. It is a very crucial part of my trading success.
Kiana: What is your advice to new traders?
Kathy: Always test before you try. There are a lot of great ideas out there, but you’ll never know if an idea is really good until you actually put it into live testing. It could be on a demo account or a small real account. But when you come up with a strategy, you need to build confidence around it. I think you can’t just pull the trigger and start trading immediately just because someone has told you that. It’s important that you do some visual back-testing by looking at the charts and actually trying to trade the strategy in real life. Because why waste your money and trade your entire portfolio using it when you can work it out in a way that lets you understand the strategy through demo accounts or smaller live accounts?
Kiana: Do you think that women with no financial background can trade forex?
Kathy: Absolutely. I think many people with no financial background trade currencies. Most people approach it from a technical analysis perspective. There is nothing wrong with that. Technical analysis is not too hard to learn. It’s hard to make money, and it’s hard to come up with a trading strategy, but it’s not as complicated as learning economics or monetary policy, for example. I think that if you start from something simple that you can understand, practice it, and try your own enhancements to it, meaning coming up with a trading strategy, there is a path toward succeeding in this market.

ELIZABETH JEANNE LE ROUX

Now I would like to introduce you to Elizabeth Jeanne le Roux. She is no economist, mathematician, or financier. She is, in fact, an international actress (yes, you can find her on YouTube), and she trades in her free time:
Kiana: Elizabeth, can you tell us a little about yourself? Where are you from?
Elizabeth: I’m from Johannesburg, South Africa. I was born in a city known as Pretoria.
Kiana: Can you tell me about your relationship status? Are you single or married?
Elizabeth: I’m single and exploring the universe at this current stage. I do have time for love.
Kiana: Besides your acting career, how do you take care of yourself? Traveling around the world must be expensive, right?
Elizabeth: There are a couple of investments that I’m currently taking care of. I have three real estate properties in South Africa. On top of that, I’m a consultant for an advertising agency. I operate globally, so wherever I am, I can access these things through the Internet. My third investment is forex. I invest in currencies. Because I travel so much, I like to purchase different currencies and sell them at different exchange rates, either over the counter or on a trading platform.
Kiana: What are your thoughts on forex trading?
Elizabeth: As you know, forex is a macroeconomic global market, so you don’t necessarily need to have a background [in finance] in order to know what forex is all about. The news is published as publicly known information to anybody, so it’s very easy to earn money with the different fluctuations in the currencies that we deal with. But I must be honest with you: you need to keep an eye out. Sometimes the fluctuations can drop without your being notified if you are not trading on a platform where you can set stops and limits.
Kiana: So I understand that you are a beautiful, independent woman and you make more than 50 percent of your income through investing. How do you feel about investing as a woman?
Elizabeth: I think it is stimulating for me to play Monopoly in my private life as well as my professional business life. It’s almost like a hobby where you invest in yourself, and you can even have fun with it!
Kiana: It is funny that you said, “invest in yourself.” I believe that is a very powerful quote. You invest and enrich your lifestyle, because not only are you making money out of it, but also you have this lifestyle of independence; you become more aware of what is going on in the world, and, as you said, it can even be a hobby, whether or not you make a lot of money out of it. I understand that with forex trading, you are not taking on a lot of leverage and are not investing too much capital, right?
Elizabeth: Correct. Forex trading is more of a short-term investment for me, while real estate is more of a long-term plan. With any kind of investment, I enjoy watching the markets going up and down, and I definitely get excited when I see my capital grow.

DID YOU LIKE THE DIVAS?

At InvestDiva.com, we have a Forex Diva finder who spots successful traders around the globe to get their take on trading the largest market in the world. Who will be the next guest on our weekly videos? It could be you! So get yourself over to www.InvestDiva.com and subscribe to get free updates and to become a winning Forex Diva.

TRADING AS A BUSINESS

TRADING AS A BUSINESS

• Travel to seminars, trade shows, and other business-related trips anywhere in the world
• Magazine subscriptions related to investing and trading
• Trips to look at corporations you are considering investing in
• The portion of your home expense that qualifies as a home business and a portion of all expenses paid on maintaining the property, utilities, etc.
• Automobile expenses
You can tell the list is rather inclusive and beneficial. Interestingly, as you begin to learn the nuances and combine all the advantages, they add up to a rather tidy sum.

HOW TO BECOME A TRADER

The IRS code does not define trade or business as it relates to the business of trading. The law that has developed comes from court cases and decisions made in the favor of taxpayers who have made this claim. The key elements in the cases were length of holding period, frequency of trades, and purpose for trading, that is, was the person’s intent to make money from dividend interest, long-term gain, or short-term trading?
If you are a currency trader, it is pretty easy to show your intent, since that is all you shoot for. If you also trade stocks, you can still make a claim for trader status even if you hold some of them long term, although it is doubtful you will anyway.
While we all hope our business, including our trading business, makes a ton of money, the reality is it won’t always do so. The good news is that if trading is a business, then your excess expenses can be used to offset income from other sources just like any other business would allow you to do. It is a win-win situation.
Let’s discuss using trader status as it relates to your personal tax return by creating a small sole proprietorship. In this case, you would place your ordinary business expenses on Schedule C, and you would report your income or loss on Schedule D, since it is still considered capital. No self-employment income is calculated on the income, and your trading losses are still limited to $3,000 per year but can be carried over indefinitely. You can also use any losses in the stock market to offset gains in the currency market.
Although the benefits of this strategy are good, there is another way, and often a better way, to operate the business. That is by incorporating the business and creating your own trade corporation.
A trade corporation is your new legal entity in which to conduct your trading. There are near-term advantages, longer-range asset protection, and family financial planning advantages. There will be some extra cost for setup and operation, but as you will quickly see, the advantages far outweigh the cost.
Your first advantage is clarity of purpose. If you form a corporation for the purpose of trading and conduct the trading in the separate entity, there will be no question regarding your trader status, nor will there be an issue about your personal tax return and the deductions you take. This is not to suggest that operating things in the sole proprietorship status is in the gray area of the tax code. It isn’t.
Some people like to keep their various businesses separate, protect assets from different creditors, and do estate and financial planning as they go. If you fall into this category of individuals, you should consider using a corporation as the entity to operate your trade business.
I have personally probably taken this to the extreme. It does cost a little more money to be extra careful, but to protect assets, I tend to open separate corporations for each separate business venture I am doing. This way I am not commingling assets, so to speak, among other companies. I primarily do this for the reduction of liability. That way if for some reason you do ever get sued, the lawsuit is basically relegated to the specific corporation in question. Starting a trading business is no different, since your assets in the trading company are not yours personally but the company’s.

WHAT KIND OF COMPANY

There are three types of corporations: C, Sub S, and LLC. A C corporation is considered a regular corporation. A Sub S corporation is so named because of the tax code section that gives it benefits. The LLC is structured to overcome some of the structural difficulties of the Sub S corporation. (Interestingly, about the time the individual states got through adopting massive legislation to get around the tax code, Congress decided it didn’t want to be outdone and amended most, but not all, of the difficult portions of the Sub S code.)
To be fair to both you as the reader and me as the author, I must now disclose that I am going to make sweeping generalities about which corporations are best and why. The problem is everyone’s circumstances are different and volumes have been written about the “best” structure to use. Nevertheless, we will attempt to weed through the tangle of red tape to uncover some solid ideas.
The C corporation is primarily used for public companies, multiple shareholders who aren’t interested in distributing profits and losses, but want to build an entity and individual businesses that benefit from a medical reimbursement plan or some types of retirement programs.
For some people, the medical reimbursement can be a great deal because under the current law, individuals and joint filers are limited to medical deductions after a 2 percent limitation of adjusted gross income.
Excepting the medical situation, you will likely benefit greatest in either a Sub S corporation or an LLC. The reason is that both have tax flow benefits at the shareholder level. This means the corporation doesn’t pay a separate tax, but the shareholders (in the Sub S) and the members (in the LLC) pay tax on any gain or take losses personally if there are any. This gives you the benefit of a personal tax shelter in years where there is a loss in the company.
It should be noted that if you are going to be the only share holder of your company, then the Sub S corporation is probably the one you should consider. Being a single-member LLC has its complications. The IRS will basically consider you a sole proprietorship if you have an LLC and you are a single member, meaning that you are the only owner. If this is the case, then you will basically be giving up the corporate benefits that you are looking for. So look to the Sub S to provide the corporate flexibility you need.
The benefit to using a Sub S is that it has been around the longest, and so most CPAs and attorneys are comfortable with it. The benefit of the LLC is that you can do some interesting family, estate, and asset protection planning.
Let’s take a look at a few examples. Let’s say you form an LLC trade corporation. In an LLC, you are allowed to issue multiple types of shares. Because you would like to shift some of your trade income to your children, you issue them a preferred class of stock that has no voting rights but has a preference of income up to a certain level.
This “income-shift” strategy allows you to maintain 100 percent control of your company and all the assets, but shifts dollars to your children, who are in a lower income bracket than you. The children can use the money to pay their bills.
Another twist on this strategy is to pay your children a salary out of the corporation for work they do. The work, depending on age and ability, would give them earned income and allow them to set up an IRA or other retirement program at an early age. While income shifting takes money out of your pocket and puts it in someone else’s, you get the deduction; and if you can control what happens to the money, it is the same as having it. Another benefit to helping your children grow an early retirement program is that you may at least have someone to support you if things don’t always go as you would like.
LLCs have another advantage; they can be used to protect assets. If you find yourself in a situation where you need to be protected, you can put your assets in an LLC and give, sell, or otherwise structure the share ownership in someone else’s name. You can continue to draw a salary from the company and control the operation of the company through special shares, which can be drafted to give you specific rights to do so.
The assets now belong to someone else and are no longer attachable by the creditor, and the income you receive is not attachable because it is a salary. (Some states give certain creditors rights to lien a portion of salary, but this can be adjusted to fit the situation.) Please note, in this example you have actually given up these shares and the assets they represent. This can be a shame. On the other hand, without that happening, you would have lost the assets to a creditor not of your choosing.
By using this structure, you at least shifted the asset to someone you know, and you get income generated from the company in the form of a salary. I would also like to point out that there are laws governing fraud on creditors. These laws do not prevent you from properly protecting yourself and your family, but they are intended to stop what are called shame transactions, where there is no truth or substance to your actions. Since we are only talking about proper planning, these and other strategies should all be available to you and used when needed.

OFFSHORE BUSINESS

Now let’s talk about one other method for setting up a business, but in this case we will talk about setting up an offshore business. You hear about it all the time, about people setting up offshore businesses. It is certainly more expensive, but it is also much more secure for liability protection.
A lot of people have set up offshore businesses to protect their profits by paying less in taxes and so forth. Well, this is not why I would recommend setting up an offshore business. I would primarily recommend that one consider setting up an offshore business for asset protection and/or liability protection. The simple fact of the matter is that if you make money, you should pay taxes. Not more than your fair share, but you should certainly be paying your taxes. Furthermore, the IRS is not stupid, so you can be sure that if you think you can get away with not paying your taxes, think again.
Okay, with that said, let’s look at some specific examples of setting up offshore corporations and protecting your assets. The best place to set up an offshore corporation is in a country that is still under the Commonwealth (formally known as the Commonwealth of Nations and what used to be called the British Commonwealth). The laws are much more beneficial to your corporation.
Some of the more proactive places to set up an offshore corporation would be Belize, Panama, Seychelles, Cook Islands, Cayman Islands, and British Virgin Islands. There are others, such as up-and-coming Dubai in the UAE, but they are more expensive and a little harder to set up in than some of the other ones I have listed.
The cost to set up one of these offshore companies is a little more than what it would cost in the United States. In the United States, you can easily set up a company for about $150 to $300; for an offshore corporation, you will pay $2,000 to $10,000. If you want to open a U.S. corporation or a foreign corporation or trust, you can go to www.jdfn.com, which offers detailed information and help in finding the right company to assist you. There is also a link to a law firm that I use that can set up a U.S. corporation in any state you want.
So for liability’s sake, let’s say you open a company in Belize, and to better protect yourself, you create an offshore trust in the Bahamas. You would have the offshore trust own the company in Belize. You would make the beneficiary of the trust someone other than you, maybe a trust you have in the United States has the ownership. You then can be a director of the corporation and open a bank account on its behalf. But if you want to take the liability one step further, you can open your bank account in, say, the British Virgin Islands.
Now keep in mind that if you are a U.S. citizen and you open a bank account in another country, you will have to file the appropriate forms with the IRS, letting the agency know that you have a foreign bank account that you control. Also for tax purposes, if you own a foreign corporation and you are the majority owner of that company, the IRS considers the foreign corporation to be a closely held corporation and will tax the foreign corporation as it would any of your other assets. There may be some additional taxes that go along with that as well. You should talk to your CPA before taking this much more aggressive approach to protecting your assets.
In the example above, we actually don’t have any ownership of the company, since we have a trust in the Bahamas that owns the company and we are not the beneficiary of the trust. However, in this example I would still claim the company as closely held, since I didn’t set the company up for tax reasons but for liability reasons.
If for some reason someone wants to sue the company, he or she is going to have to sue a company that is domiciled in Belize, that is owned by a trust in the Bahamas, and that has a bank account in the British Virgin Islands. Good luck with that one. But, again, if you’re making lots of money and your trading business is really doing well, you may want to consider protecting your hard-earned dollars from unscrupulous attorneys and frivolous lawsuits.

domingo, 18 de febrero de 2018

Forex Is a Game

                                               Preface
You can’t afford to ignore forex anymore.
This is an urgent message I carry everywhere I go. It really doesn’t matter who we are or what stage in life we’re at. You could be in school and you can’t seem to figure out the rules of global finance. You could be holding down a job but you desire to make a decent second income in your spare time.
You could already be involved in the financial markets as a retail trader or investor, but with low yields and depressed growth all around the world, you are searching for an asset class that offers unparalleled returns. You might even be a fund manager who holds an international portfolio in different asset classes, such as equities, bonds, and commodities.
However, with central banks lowering rates and injecting record amounts of liquidity into the financial system, you realize the importance of protecting your entire portfolio against currency risks.
Finally, you might be someone running a multinational company. You could be based in one country, but your offices span across many countries all around the world. Expenses for salaries, infrastructure, machinery, and supplies are paid out in different currencies every single month. As the business gets larger, you can’t turn a blind eye to the currency fluctuations, which have a significant impact to the company’s bottom line every month.
If you find yourself in any one of these categories, this book is for you. The sooner we all understand the forex “game,” the better it is going to be for us. Forex is a game for three reasons. First, playing it must be fun. Second, we play it with an intention to win. Finally, it has rules. If you break the rules, the rules will break you.

HOW IT ALL BEGAN

I had a painful start to forex trading because I broke a cardinal rule. Allow me to share my story with you. I’ll be the first to admit that I’m not a smart guy. I don’t have a finance degree or an economics degree.
I studied chemical engineering in school but graduated with third-class honors, dashing my mother’s hopes of my becoming a top chief executive for a Fortune 500 company. After graduation, I proceeded to apply for a job at petroleum giant Shell, but I haven’t heard from them yet.
Sometimes I console myself by thinking that my resume lost its way in the mail. I didn’t have much materially then, but what I had was the burning desire to achieve success in life. It was this desire to succeed that led me to my first experience with forex trading.
Six years ago, I was with a friend in a local coffee shop when he suddenly flipped open his laptop to reveal a screen full of charts. Through the charts and jumping numbers on the screen, I asked him, “What’s this?”
He coolly replied, “Forex trading.”
Thinking it was some hobby he recently picked up, I asked again, “Real cash?”
“Yes.” He nodded smugly. “Real cash.”
That began to draw me in, slowly but surely. Looking back, it wasn’t the fact that forex was the biggest financial market in the world that drew me in. What drew me in was the fact that all you needed was an Internet connection and a laptop to make money from this market anywhere in the world.
Fascinated, I started to ask my trader friend some questions. When he shared with me the story of how George Soros broke the Bank of England on September 16, 1992, and made $1 billion in a day, I was hooked.
I’m the kind of guy who only needs one live example of someone who has done something to convince me that I can do it too. Excited about this new discovery called forex trading, I went off and started to do my own reading on free websites.
Soon I started my first account with USD3,000.

MY FIRST TRADE

My first trade was on the GBP/USD. It was on an uptrend, and the price had reached a new high. This is it, I thought, rubbing my hands gleefully. I’m going to be a millionaire by next Friday. Seeing that the price had reached a new high, I was convinced that gravity would pull it right down.
I clicked “sell.” That poignant moment was the start of my painful lesson. After I clicked “sell,” the price continued to creep up. That’s not supposed to happen, I thought.
As prices continued climbing, I decided to hit the sell button again, only this time with double the lot size (and double the intensity) as my first trade. I reasoned that if I clicked twice the number of lots, all that needed to happen was for prices to fall a little before I could see some nice profits.
After the second “sell” click, I couldn’t believe my eyes. The price went up further. My hands started to get sweaty. My head started to shine from the beads of sweat that started to trickle down from my bald head. Murphy’s Law was in full motion. In desperation, I actually grabbed the laptop and turned it upside down to paint me a picture of falling prices. My ego was badly hurt.
“It’s got to come down,” I muttered to myself. At that point, I clicked “sell” for a third time, with double the lot size of the second trade.
The numbers on my laptop screen at the time weren’t very far from the numbers my friend had shown me. The only difference was that mine had a stubborn negative sign preceding them that just wouldn’t go away. A couple of days after my third dreaded click, the broker closed off all my positions. I was hit with the dreaded margin call.
In a grand total of just six days, I had lost my entire account.
Whenever I share my story in my forex seminars, I replicate the scenario and draw an uptrend on the whiteboard.
“Would you click ‘buy’ or ‘sell’ over here?” I always ask, as I circle the highest point reached by the price. At every single seminar, most people choose to sell, confident that high prices will fall.
It’s almost a consolation to know that we human beings are wired in much the same way. Needless to say, after I blew up my account, I was devastated.

THERE ARE NO SUCCESSFUL BUSINESSES

Losing USD3,000 of my hard-earned money in a week was heart-wrenching.
Self-defeating thoughts appeared in my mind incessantly.
“Forex is risky.”
“Forex is gambling.”
“Forex is not for me.”
I was tempted to wash my hands from the forex market and walk away.
However, it was at this low point of my life that the words of a rich and successful Chinese businessman who was my mentor came to mind.
image
“There are no successful businesses in this world, only successful people.”
At this point, I stopped the pity party and asked myself two questions: Do I know people who are making money in the forex market? And: Do I want to be in that group?
I picked myself up again after I answered yes to both questions. I started to work on myself. You see, it’s very easy for you and me to get sucked into recognizing that 80% of people lose money in the forex market.
However, why can’t we decide to be in the group that makes money? Isn’t it just a simple switch in our thinking? If 20% of the people are making money, let’s decide first to have our names in that special group. That self-talk was the turning point in my forex trading journey. I made up my mind to master forex trading.
Picking myself up from the setback, I began to equip myself with the right trading skills. I started devouring books by successful traders. Emulating their beliefs, knowledge, and habits, I worked hard on honing my trading skills every single day. My quest for mastery also led me to seek out two of the biggest names in the forex industry as my mentors: Kathy Lien and Ed Ponsi.
I reasoned that a mentor could help me to drastically cut short my learning curve. And cut short my learning curve they did.
Knowing what I know now, I recognize that the cardinal rule that I broke in my first live trading experience was to trade against the trend.
Within three years and several buckets of blood, sweat and tears later, I became an expert in trading the forex market. Less than a year later, I was invited to appear on CNBC to give my opinions on global finance.

WISH THAT YOU WERE BETTER

Given my bubbly character, many people think that it’s easy being on camera, speaking live to a camera that holds the attention of over 300 million viewers. The truth for me is that it’s not.
“Mario, what do you think the CPI is going to be for Singapore?”
“Mario, what’s your view on the U.S. dollar this week?”
“Mario, do you think China will report a good number for trade surplus this month?”
The TV anchor and the reporters on site fire questions from every angle, and you need to have the answers at your fingertips. They expect you to know, or you have no business being on the biggest stage in international finance.
How ridiculous it would be if I were to fake an answer like “I think inflation in Singapore is going to hit 65% next year.” I would be laughed off the chair.
So I had to study. In fact, to be in that three-minute hot seat, I had to study for three hours. That’s right: three full hours of study for three minutes on CNBC.
Thankfully, I did well. In fact, I did so well that I was called back, again and again. CNBC has three major shows that cover the financial markets. The early morning segment is called Squawk Box, in the early afternoon it’s called Capital Connection, and the evening’s slot is called Worldwide Exchange.
Eventually I was invited to appear on all three major shows. In fact, I was then asked to be a guest host on Worldwide Exchange. As guest host, I sat with the news anchor and instead of being there for three minutes, I would be there for a full hour.
My job was to have a conversation with some of the most brilliant financial minds on the planet who would come in and take their place on the hot seat. As I warmed up to the new role as a guest host, I had an important revelation. The job was getting easier. In fact, I didn’t have to study when I was guest host.
Do you know why? Because this time, it was my turn to ask the all-important question, “So, Jack, what’s your view on the U.S. dollar this week?”
This was my revelation: As you get better, it gets easier.
So, my friend, don’t wish that it were easier, wish that you were better.
Kaizen is the Japanese word for improvement. When we embrace kaizen in any endeavor, mastery is bound to be the result.
My kaizen approach to forex trading has enabled me to be a consistently profitable trader. Today, I am living the dream of traveling and spreading the message of profitable forex trading everywhere I go. I’ve even had the privilege to coach forex traders in some of the largest banks in the world. Forex trading has given me this new life, and I know that it can do the same for you.

AUDIENCE

Today the Forex Market is considered the largest financial market in the world. With that famous tagline, thousands of books have sprung up giving people insights into this amazing market. I did not write this book with the intention of adding to the vast list of global resources already available on the topic of forex.
My inspiration for this book is drawn from three specific groups of people:
1. All forex traders around the world. It is my humble wish that this book will become the platinum standard in forex education. The rich content here will suit you regardless of which stage you are in your trading career: beginner, intermediate, or advanced. Pay particular attention to Chapter 5, which puts you through a fun and interesting quiz. At the end of the quiz, you will discover which one of the five categories of traders you belong to. If you stick to the strategies pertinent to your profile, you will be pleasantly surprised by the results.
2. Finance and business professionals who are not currently involved in the forex market. You may be involved in equities, fixed-income instruments, or commodities. An understanding of global finance and forex movements will greatly help you in your decision making. Remember, capital flows into a country first, before it flows into any specific asset class. An understanding of the forex market puts you in prime position to anticipate these flows. Chapter 3 is dedicated to business corporations that must understand the importance of hedging. Hedging helps corporations gain certainty of price, even when payments are made or received in different currencies. Hedging thus helps corporations to mitigate the foreign exchange risk exposure.
3. Ordinary folks outside of the finance industry who are looking to create a powerful second income. With a potent combination of unprecedented liquidity and sovereign debt levels in the world today, there truly has never been a better time to get involved in forex. I ask you humbly to consider this opportunity.

OVERVIEW OF THE CONTENTS

The book is broken into two parts:

Part One: Forex Is a Game

Part One of this book is divided into five chapters, and it centers on the core description of forex as a game. We discover insights on the rules of the game, the major players, and how money is made.
Chapter 1 introduces the forex market. It begins by describing the total daily turnover and the seven major currency pairs. It then explains how to read a forex quote and how prices move. The chapter ends with a framework of how margin and leverage are employed in a forex trade.
Chapter 2 focuses on how money is made in a forex trade. We learn about long and short and the three points in every trade. We then move to the four big reasons that cause currencies to move and get a grasp of the fraction theory. Chapter 2 ends with an understanding of market structure.
Chapters 3 and 4 cover the six major players in the forex market and the numerous advantages associated with trading the market. Some of the major players include central banks, commercial banks, multinational companies, and retail traders. We also get a glimpse of three of the biggest blow-ups in proprietary trading in banking history.
Chapter 5 is devoted to discovering your unique profile in trading. It includes a profiling test to help you find out how your personality can help or hurt your trading style. There are essentially five types of traders: scalper, day trader, swing trader, position trader, and mechanical trader. By the end of this chapter, you will know which group you belong to.

Part Two: Strategies to Win the Game

Part Two is also divided into five chapters. Each chapter covers strategies for the five profiles of scalper, day trader, swing trader, position trader, and mechanical trader.
Chapter 6 covers two strategies for scalpers, called the rapid fire and the piranha. These strategies are used on the shortest time frames, namely the minute chart and the 5-minute chart.
Chapter 7 covers four strategies for day traders. The first two strategies are focused on breakouts while the next two are centered purely on trading the news. A unique way of trading the news, called the Rule of 20, is also discussed here. All four strategies are employed using the 15-minute and 30-minute time frame.
Chapter 8 covers five strategies for swing traders. As swing traders typically exit their positions within two to five days, the time frames used for the strategies are longer than the day traders. Hence, all five of the swing trading strategies are used on the 1-hour and the 4-hour time frame.
Chapter 9 covers three strategies for position traders. The first one, swap and fly, takes advantage of the interest rate differentials between the currencies and aims to earn maximum returns by holding on to positions for an extended period of time. The next two strategies are used specifically for the two most popular commodities in the world: oil and gold.
The final chapter covers three strategies for mechanical traders. Traders in this category are oblivious to the passing of time. This is why all strategies discussed here employ three different time frames from the other categories: the 5-minute chart, the 15-minute chart, and the daily chart.

art One

Forex Is a Game

Chapter 1 introduces the forex market. It begins by describing the total daily turnover and the seven major currency pairs. It then explains how to read a forex quote and how prices move. The chapter ends with a framework of how margin and leverage are employed in a forex trade.
Chapter 2 focuses on how money is made in a forex trade. We learn about long and short and the three points in every trade. We then move to the four big reasons that cause currencies to move and get a grasp of the fraction theory. Chapter 2 ends with an understanding of market structure.
Chapters 3 and 4 cover the six major players in the forex market and the numerous advantages associated with trading the market. Some of the major players include central banks, commercial banks, multinational companies, and retail traders. We also get a glimpse of three of the biggest blow-ups in proprietary trading in banking history.
Chapter 5 is devoted to discovering your unique profile in trading. It includes a profiling test to help you find out how your personality can help or hurt your trading style. There are essentially five types of traders: scalper, day trader, swing trader, position trader, and mechanical trader. By the end of this chapter, you will know which group you belong to

Reading a Forex QuoteForex prices are quoted in currency pairs and almost always to four decimal places. For example, if a forex quote is given as EUR/USD = 1.3255, the currency on the left is termed the “base currency” while the currency on the right is termed the “counter currency.” The base currency always has a value of 1. In the example, the euro is the base currency while the U.S. dollar is the counter currency. This is how we would read the forex quote: 1 euro is equivalent to 1.3255 U.S. dollars at that point of time.

Chapter 1

How to Play the Game

This chapter presents some of the essentials that you must know when you start trading the forex market. In it we describe the seven major currency pairs that are most commonly traded worldwide and explain how prices move. We also discuss the yen factor, which quotes forex prices in two decimal places as opposed to the normal four. The final part of the chapter defines the value of a pip and explains how margin and leverage affect trades.

THE FOREX GAME

The forex game has changed much over the years. Today, it is undisputedly the largest financial market in the world, with a daily trading volume in excess of USD4 trillion. The authoritative source on global forex market activity is the Triennial Central Bank Survey of Foreign Exchange and Derivatives Market Activity, published by the Bank for International Settlements (BIS).
Available official figures for daily forex turnover are taken from the last survey done in April 2010. Fifty-three central banks and monetary authorities participated in the survey, collecting information from 1,309 market participants.
An excerpt from the BIS report reads:
The 2010 triennial survey shows another significant increase in global foreign exchange market activity since the last survey in 2007, following the unprecedented rise in activity between 2004 and 2007. Global foreign exchange market turnover was 20% higher in April 2010 than in April 2007. This increase brought average daily turnover to USD4.0 trillion (from USD3.3 trillion) at current exchange rates.
At the heart of the report, an interesting fact stood out. Apparently, 48% of the growth was in spot transactions, which represented 37% of the total turnover of forex transactions worldwide. Spot transactions are mostly traded by retail traders—that’s everyday people like you and me. This group is rapidly expanding and is expected to contribute an even larger portion of total forex turnover by the time the next survey is out.
This Triennial Survey is done once every three years, and the next one is due in April 2013. Publication of preliminary results will follow four months later. The official figure for daily forex turnover is expected to be well over USD4 trillion at that time. Figure 1.1 shows the breakdown of the daily turnover by instrument.
FIGURE 1.1 Breakdown of the Average Daily Turnover by Instrument (US$ billion)
Source: Bank for International Settlements, September 2010
image
The USD4 trillion daily turnover on the forex market is truly staggering. According to the April 2010 BIS Triennial Survey, this figure is:
  • More than 23 times the average daily turnover of global equity markets
  • More than 40 times the annual turnover of world gross domestic product
In fact, in the latest BIS Quarterly Review, dated March 2012, Morten Bech, senior economist in the Monetary and Economics Department of BIS, estimated that “global FX activity was around $4.7 trillion a day on average in October 2011, compared with $4.0 trillion reported by the latest triennial central bank survey of foreign exchange activity conducted in April 2010.”
Imagine that: USD4.7 trillion in a day on average in October 2011!
It certainly won’t be surprising to see the figure top the USD5 trillion mark when the official figures are released from the April 2013 survey. The good news for the retail trader is this: As a result of increasing demand, transaction costs such as spreads have decreased, technology offerings have improved, and value-added services on forex brokerage firms have exploded.
There truly never has been a better time to start trading on the forex market. This exciting message is further reinforced by the record numbers of everyday folks—people like you and me—who continue to jump onboard the forex bandwagon at an accelerated pace.

FOREX AND THE SEVEN MAJORS

Foreign exchange, or forex for short, is a market where one currency is exchanged for another. This is the reason why forex is quoted in currency pairs. Each world currency is given a three-letter code as set out by the International Standards Organization (ISO) and governed by the ISO 4217.
The eight most commonly traded currencies are:
1. USD (U.S. dollar)
2. EUR (euros)
3. GBP (Great Britain pound)
4. AUD (Australian dollar)
5. JPY (Japanese yen)
6. CHF (Swiss franc)
7. CAD (Canadian dollar)
8. NZD (New Zealand dollar)
The eight most commonly traded currencies form the seven major currency pairs. These seven majors dominate the forex market in terms of traded volume. Since January 2012, it is estimated that the seven majors account for over 85% of the daily traded volume in the forex market.
These seven major currency pairs are:
1. EUR/USD: euro versus U.S. dollar
2. USD/JPY: U.S. dollar versus Japanese yen
3. GBP/USD: Great Britain pound versus U.S. dollar
4. AUD/USD: Australian dollar versus U.S. dollar
5. USD/CHF: U.S. dollar versus Swiss franc
6. USD/CAD: U.S. dollar versus Canadian dollar
7. NZD/USD: New Zealand dollar versus U.S. dollar
Figure 1.2 shows how much volume is contributed by the seven majors. It also shows that the EUR/USD currency pair contributes the highest percentage of daily traded volume, with 28%.
FIGURE 1.2 Daily Traded Volume Contributed by the Major Currency Pairs
image
For all of the listed seven majors, the U.S. dollar features in either the left-hand side or the right-hand side of the currency pair. This is why the U.S. dollar is the most liquid currency in the forex world.

Reading a Forex Quote

Forex prices are quoted in currency pairs and almost always to four decimal places. For example, if a forex quote is given as EUR/USD = 1.3255, the currency on the left is termed the “base currency” while the currency on the right is termed the “counter currency.” The base currency always has a value of 1. In the example, the euro is the base currency while the U.S. dollar is the counter currency. This is how we would read the forex quote: 1 euro is equivalent to 1.3255 U.S. dollars at that point of time.
This forex quote tells us two things. First, if traders are eager to purchase one unit of the base currency, they would have to pay 1.3255 U.S. dollars to buy 1 euro. If, however, traders are eager to sell one unit of the base currency, they would receive 1.3255 U.S. dollars for selling 1 euro. It is also important to note that the exchange rate always fluctuates with changing market conditions. At any time, the euro can weaken or strengthen against the U.S. dollar.
If the EUR/USD quote moves up from 1.3255 to 1.3287, the euro is strengthening against the U.S. dollar. However, if the EUR/USD quote moves down from 1.3255 to 1.3138, the euro is weakening against the U.S. dollar.

The Yen Factor

Not all forex quotes are created equal, especially when it comes to the Japanese yen. Whenever the Japanese yen is in the counter currency, the forex quote is given in two decimal places instead of four. Let’s take a look at an example.
USD/JPY = 80.55
The quote tells us that 1 U.S. dollar is equivalent to 80.55 Japanese yen at that point of time.
If the USD/JPY quote moves up from 80.55 to 80.87, the U.S. dollar is strengthening against the Japanese yen. If the USD/JPY quote moves down from 80.55 to 79.78, the U.S. dollar is weakening against the Japanese yen.

Pip

Pip stands for “price interest point.” It is the unit of measurement to express the change in value between two currencies.
Let’s say that the current AUD/USD price is 1.0235. If the price rises to 1.0236 or falls to 1.0234, this is a movement of 0.0001, or 1 pip. If the current price of USD/JPY is 81.33, and if the price rises to 81.34 or falls to 81.32, this is a movement of 0.01, or 1 pip.
One pip is thus the smallest change in value for any given forex quote, whether it’s quoted to two or four decimal places. Here are more examples:
  • When the EUR/USD quote moves up from 1.3255 to 1.3287, it is a movement of 32 pips.
When the EUR/USD quote moves down from 1.3255 to 1.3138, it is a movement of 117 pips.
  • When the USD/CHF quote moves up from 0.9148 to 0.9263, it is a movement of 115 pips.
When the USD/CHF quote moves down from 0.9148 to 0.9126, it is a movement of 22 pips.
  • When the USD/JPY quote moves up from 80.55 to 80.87, it is a movement of 32 pips.
When the USD/JPY quote moves down from 80.55 to 79.78, it is a movement of 77 pips.

PIPETTE

Many brokers today extend forex quotes beyond the standard four and two decimal places, to five and three decimal places respectively. As an example, a broker could quote USD/CAD as 1.00583. If the USD/CAD quote rises to either 1.00584 or falls to 1.00582, the movement is termed 1 pipette.
Similarly, if USD/JPY is quoted as 81.338 and if the currency pair rises to either 81.339 or falls to 81.337, the movement is termed 1 pipette as well.

HOW DO WE CALCULATE THE VALUE OF ONE PIP?

Different currencies have different values. Hence, the value of a pip is different for each currency.
The first thing to take note of when calculating pip value is that for most forex quotes, particularly the seven majors, the U.S. dollar is either the base currency or the counter currency.
In the USD/CHF quote, the U.S. dollar is the base currency. In the AUD/USD quote, the U.S. dollar is the counter currency.
Let’s calculate the pip value for each example, starting with the U.S. dollar as the base currency (see Examples 1.1 and 1.2).
EXAMPLE 1.1: VALUE OF 1 PIP
Let’s take the current price of USD/CHF as 0.9235. The smallest movement for a pip is thus 0.0001.
The formula for calculating pip value is:
Pip value = Smallest decimal move/Current exchange rate
= 0.0001/0.9235
0.000108
The value of 1 pip when the USD/CHF is at 0.9235 is USD 0.000108.
To determine the pip value for Japanese yen pairs, let’s take a look at the next example.
If the current price of USD/JPY is 81.55, the smallest movement for a pip is 0.01.
The formula for calculating pip value is:
Pip value = Smallest decimal move/Current exchange rate
= 0.01/81.55
0.000123
The value of 1 pip when the USD/JPY is at 81.55 is USD 0.000123.
EXAMPLE 1.2: VALUE OF 1 PIP
Let’s take a look at how pip value is determined when the U.S. dollar is the counter currency.
If the AUD/USD is now 1.0237, then:
Pip value = Smallest decimal move/Current exchange rate
= 0.0001/1.0237
0.00009768
The value of 1 pip when the AUD/USD is at 1.0237 is AUD 0.00009768. Take note that in this case, the value of 1 pip is quoted in Australian dollars (AUD).
To find out the value of 1 pip in U.S. dollars, we simply take the current pip value and multiply it by the current exchange rate:
Pip value (in USD) = Pip value (in base currency) × Current exchange rate
= 0.00009768 × 1.0237
= 0.0001
Thus, the value of 1 pip when the AUD/USD is at 1.0237 is USD 0.0001.
Although the process may look complicated, the good news is that every single broker you trade with will calculate this value automatically for you.

LOT SIZE

Most forex brokers today provide up to four categories of lot sizes for the trader. These are:
1. Standard lot
2. Mini lot
3. Micro lot
4. Nano lot
A standard lot is defined as 100,000 units of the base currency. For an example, when you buy 1 standard lot of EUR/USD, you are purchasing 100,000 euros with U.S. dollars.
A mini lot is defined as 10,000 units of the base currency. For an example, when you buy 1 mini lot of GBP/USD, you are purchasing 10,000 pounds with U.S. dollars.
A micro lot is defined as 1,000 units of the base currency. For an example, when you buy 1 micro lot of USD/CHF, you are purchasing 1,000 U.S. dollars with Swiss francs.
A nano lot is defined as 100 units of the base currency. For an example, when you buy 1 nano lot of USD/CAD, you are purchasing 100 U.S. dollars with Canadian dollars.
The lot size decreases by a factor of 10 from standard, to mini, to micro, and finally to nano, as shown in Table 1.1.
TABLE 1.1 Four Categories of Lot Sizes
Lot Size CategoryNumber of Units
Standard100,000
Mini10,000
Micro1,000
Nano100

Standard Lot

If you trade standard lots, then, using the same values as Example 1.1:
image
Looking at the USD/JPY example with quotes to two decimal places:
image
Using the same values as Example 1.2:
image

Mini Lot

If you trade mini lots instead, the value of 1 pip will decrease by a factor of 10.
Using the same values as Example 1.1:
image
Looking at the USD/JPY example with quotes to two decimal places:
image
Using the same values as Example 1.2:
image

LEVERAGE

Financial success is almost always accomplished through the use of leverage. I sum up the definition of leverage in four simple words: “Doing more with less.”
In the previous section, we talked about how the value of 1 pip dramatically increases when a trader trades a standard lot or even a mini lot. In reality, not many retail traders are able to fork out $100,000 or $10,000 to trade one standard or one mini lot.
This is where the forex broker steps in. Simply put, the business model of forex brokers is to provide retail traders with leverage so that they do not need to lay out the entire sum of $100,000 to trade one standard lot.
Let’s see how this works. If the broker provides you with leverage of 100:1, instead of $100,000, all you need to do is to pay $1,000 to trade one standard lot. Sometimes the $1,000 is referred to as margin. It is also the basis of how brokers refer to our trading account as a margin account.
Margin basically allows a trader to purchase a contract without the need to provide the full value of the contract. In the example, $1,000 was the margin required for you to trade $100,000 on a leverage of 100:1.
Using a simple formula:
Margin required = Lot size/Leverage
Hence, for the example:
image
Similarly, if the broker provides you with leverage of 50:1, instead of $100,000, all you need to do is to lay out $2,000 to trade one standard lot. Margin percentage in this case is then 2%.
In summary, the higher the leverage provided by the broker, the less you need to pay out to trade one standard lot.
Table 1.2 summarizes the leverage and subsequent margin requirements when you trade.
TABLE 1.2 Margin and Leverage
Margin RequiredMaximum Leverage
5%20:1
3%33:1
2%50:1
1%100:1
0.5%200:1
0.2%500:1
From the table, it would be logical for us to conclude that we should choose the highest leverage available, since that would require us to pay out the least amount of cash to trade one standard lot.
This is not true.

Risk of Excessive Leverage

Leverage is a double-edged sword. While it has the potential to magnify a trader’s gains, it certainly has the potential to magnify losses as well. In fact, the greater the leverage, the greater the risk.
Let’s take a look at an example.
Both Trader A and Trader B open an account with a broker and start trading with a capital of USD10,000. Trader A uses leverage of 100:1 while Trader B uses leverage of 10:1. Both traders then decide to sell EUR/USD because the ongoing sovereign debt crisis is putting some pressure on the euro.
Trader A’s total contract size is 100 × $10,000 = 1 million. This equals to 10 standard lots. Trader B’s total contract size is 10 × $10,000 = $100,000. This equals to 1 standard lot.
For EUR/USD, we learned that 1 pip equals USD10 for one standard lot.
If the trade goes against them by 50 pips, both traders will incur these losses:
Trader A: (10 lots) × (50 pips) × ($10/pip) = USD5,000
Trader B: (1 lot) × (50 pips) × ($10/pip) = USD500
The USD5,000 loss represents 50% of Trader A’s trading capital, but the USD500 loss represents just 5% of Trader B’s trading capital.
Take a look at Table 1.3 for the summary of two traders who trade with different leverage.
TABLE 1.3 Trading with Different Leverage (USD)
Trader ATrader B
Trading capital$10,000$10,000
Leverage used100 times10 times
Total value of transaction$1 million$100,000
50 pip loss−$5,000−$500
% loss of trading capital50%5%
% of trading capital remaining50%95%
In conclusion, while leverage has the potential to magnify your profits, it also has the power to amplify your losses. It cuts both ways. After the global financial crisis of 2008 to 2010, U.S. regulators moved to regulate the forex industry there. On October 18, 2010, the National Futures Association passed rules to limit the amount of leverage retail forex brokers can provide. The rules limited leverage to 50:1 on major currencies and only 20:1 on minor currencies.

SUMMARY

The forex market is the largest financial market in the world, trading in excess of USD4 trillion in a single day. Although hundreds of currencies change hands every day, most of the trading centers on seven major currency pairs. The currency pair that handles the highest volume of trade is the EUR/USD.
A forex quote is always displayed in pairs. Examples include EUR/USD, USD/JPY, and AUD/CHF. The currency on the left is called the base currency while the currency on the right is called the counter currency. Almost all currency pairs are quoted to four decimal places, except when the Japanese yen appears in the counter currency. In such cases, the forex quote is displayed in two decimal places.
A pip is the smallest price movement in a currency pair. If the EUR/USD moves up from 1.3435 to 1.3436, this movement is called 1 pip. Similarly, if the same quote moves down from 1.3435 to 1.3434, the movement is also called 1 pip. Whenever the U.S. dollar appears as a counter currency, 1 pip earns the trader USD10 for one standard lot.
Some forex brokers go one step further and quote prices to five decimal places. For such brokers, the EUR/USD quote could be seen as 1.34358. It is important for us to take note that the fifth decimal place is not called a pip but a pipette. Quotes that have the Japanese yen as the counter currency are displayed in three decimal places instead of two in these cases.
Brokers provide retail traders with leverage to trade the forex market. Without leverage, a trader would need to pay out USD100,000 to trade one standard lot of currencies. With a 100:1 leverage, a trader would need to put up only 1/100th of the entire amount, or USD1,000. This amount is called margin. Margin basically allows a trader to purchase a contract without the need to provide the full value of the contract.
The higher the leverage employed, the smaller the margin required to trade one standard lot. Some brokers even offer leverage up to 500:1. This means traders need only USD200 to control USD100,000 worth of currencies.
Leverage is a double-edged sword. Although it helps to magnify a trader’s gains, it can also amplify a trader’s losses. Hence, it is imperative that traders fully understand the pros and cons of leverage before deciding the appropriate amount of leverage to employ.
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