What is Forex

What is Forex? Why trade Forex?

The foreign exchange market or forex for short is the buying and selling of currencies, and
its one of the fastest growing markets in the world. From 2007 to 2010, forex market activity
increased by 20%, with average daily turnover reaching nearly $4 trillion in April of 2010.

Forex trading works much like it does with stocks, you buy low and you sell high. The benefit of
trading Forex is that you dont have to choose from thousands of companies or sectors. Plus, you
can make things even simpler than choosing which company to buy.
For example, most people, even those that are new to forex, have an opinion on the US dollar
and the US economy. They can easily take their opinions and translate them into a forex trade.
Buying or selling US Dollars as simple as they buying or selling a companys stock.
Also, another advantage of the FX market is that it doesnt begin at 9AM and end at 4PM.
Trading takes place 24 hours a day, 5 days a week. For most people 24 hour trading means they
can trade before or after work. Plus, you have the flexibility to make your trades online.

Plus, you can buy and sell at any time, in up trends (also called bull markets) and in down trends
(also called bear markets).
Its easy to get started. You can sign up for a free practice demo account to practice trading
online.
The time to trade Forex is now. Join the millions of traders around the world.

Welcome to Forex
Each day, more and more traders find the ever expanding Forex market; making the shift from
other asset classes for a variety of reasons.
Around-the-clock trading availability, wide geographical dispersion, and pure unbridled
opportunity have contributed to the growth in this market, as average daily volume in the FX
Market nears $4 trillion dollars ($3.98 Trillion per the Bank of International Settlements).
Thats nearly $4 Trillion, in one day.
The goal of this article is to explain the nuances of the Forex market, highlighting key
similarities and differences from other popular trading vehicles.
The FX Quote
The first thing that most new traders will notice is the FX quote. When trading stocks or futures,
quotes can generally be read easily, as they are one-sided; meaning when you read a quote on
Google, you are looking at the price at which traders can buy or sell Google. However when you
want to trade a currency, such as the Euro, you have quite a few options. If you want to trade the
Euro, you can pick a variety of different ways of doing so.
You can choose to pair the Euro with the US Dollar. This would be the EUR/USD currency pair,
which is the most common, liquid currency pair in the world.

Or perhaps you wanted to make a different type of play and choose to marry the Euro with
another currency, such as the Australian Dollar (abbreviated AUD), or the Japanese Yen
(abbreviated JPY).
Traders can choose to trade the Euro in a wide variety of ways, based on their goals and
prevailing opportunities in the market.
This really isnt all that different than stocks.
Lets go back to our quote on Google. If GOOG is trading at $650.00, we can think of this in
currency terms as GOOG/USD at $650 (Google quoted in terms of US Dollars is trading at
$650).
We can also quote Google in terms of Euros.
Lets say that the spot quote on EUR/USD was $1.50, meaning that each Euro was worth One
Dollar and Fifty Cents. We can then divide our $650.00 price on Google with the exchange rate
of 1.5 Dollars for every Euro (remember 1.50 is euros quoted in terms of dollars) to get the
equation ($650/1.5 = $433.33). So Google, quoted in terms of Euros with the above information
would look like:
GOOG/EUR = $433.33
Just like any other asset class, as the trader I want to look to buy low and sell high. Or sell high,
and buy back to cover at a lower price for short positions.
When we sell a currency pair, we are selling it relative to another currency. Lets take our
EUR/USD example from above. If I were to sell the EUR/USD currency pair, I would be selling
Euros. I would also be buying dollars. My goal in this trade would be for Euros to weaken, the
Dollar to strengthen, and price to go lower so that I could cover my short position at a lower
price.
Five Digit Pricing
Another key difference in the quote of an FX pair is the fact that prices are offered, in many
cases, to five digits. Most markets are denominated in a much more common sense manner,
using prices that resemble those which we see in our everyday lives, quoted to 2 decimal places.

When I want to buy some flour at the store, the price will be quoted 2 digits beyond the decimal
place; like $4.56. If I want to buy a car, once again, prices are quoted 2 places past the decimal
with a price such as $54,367.31.
But in the FX Market, more precision is needed, and prices are quoted up to 5 digits beyond the
decimal. Lets look at a quote on EUR/USD for further examination.
Lets assume that the bid on EUR/USD is 1.27218.
The first three digits of this number are just like any other price that we will see. In this case the
Euro is worth One dollar, and 27 cents. The digits after help further define this quote.
The next 2 digits in this quote are called pips, which is short for percentage in point. In this
quote, the Euro is trading at 1 dollar, 27 cents, and 21 pips, or 21/100ths of a cent. Another way
of saying this same quote would be One dollar, 27 cents, and 21 pips.
The fifth digit of this quote is called a fractional pip, and some forex brokers do not offer this
fifth digit. The fifth digit further helps define price, and represents tenths of a pip. In the case of
the above quote, it can be read One dollar, 27 cents, 21 pips, and 8/10th of a pip.
Below is an example of another quote, with full annotation.

Many traders first entering FX wonder why such precision is needed with prices. That leads us
into the next unique aspect of the FX Market.
Leverage
The current average daily range (over the past 14 days) of the EUR/USD currency pair is
approximately 115 pips. Using the EUR/USD current market price of (1.2726 as of this writing),
the average range is approximately .9%, or less than 1%.

This is much less volatility than many traders, including myself, are looking for.
In the FX market, leverage is available so that I can make these smaller moves work in the way
that I want. For most traders in the United States, up to 50X leverage is available. Meaning, I
could lever up a .9% daily move 50 times on my portfolio, theoretically allowing me to turn a
.9% gain into a 45% gain at 50:1 leverage.
The thing that traders entering the FX Market have to keep in mind is that these excessive levels
of leverage can be counter-productive.
Most professional traders keep their leverage inside of 10:1. Meaning, if they have $10,000 on
deposit with their broker, they will keep their position sizes under $100,000. Or if they have
$2,000 on deposit, they will keep their positions under $20,000.
To find leverage, we can simply multiply the account deposit times the leverage factor (such as
10X or 5X) to find the desired position size to stay inside of their desired leverage level.
Lets walk through a full example together.
Lets assume that our trader has $10,000 on deposit, and wanted to use a 2x leverage factor. This
would allow them to open a trade of up to $20,000.
Lets assume they wanted to speculate on the EUR/USD currency pair.
They could purchase (or sell) 2 standard lots (each standard lot is $10,000 of the base currency,
or the second currency in the quote), to arrive at a position size of $20K.
Traders deposit: $10,000
Leverage Factor: 2X
Position Size: $20,000 (or 2 standard lots, as each standard lot is $10,000 USD)

What Are We Trading?

When money flows into a currency, it strengthens, and when money flows out of a currency,
it weakens.
When we place a trade in the Forex market, we are buying one currency and selling the other.
This is why Forex is traded in currency pairs. As a visual example, we can reference the image
below.

If we buy a currency pair, like the EUR/USD, we are buying euros and selling dollars. We place
this trade when we believe the EUR/USD exchange rate will rise and allow us to sell back our
euros for a larger amount of dollars at some point in the future.
But in the forex market, we can trade the other direction as well. So we could sell the EUR/USD,
effectively selling euros and buying dollars. With that trade, we would want the EUR/USD
exchange rate to fall so we can buy back the euros for less dollars than we originally sold them
for.

So not only do we have a goal of buying low and later selling high, we have the option to sell
high first, and then buy low later. There are no restrictions on short selling and we do not need to
own any euros prior to selling the EUR/USD. This is what people refer to as a two-way
market.

What is a Pip?
PIP stands for Point In Percentage. More simply though, a pip is what we in the FX would
consider a point for calculating profits and losses.
When trading a mini lot (10k units of currency), each pip is worth roughly one unit of the
currency in which your account is denominated. If your account is denominated in USD, for
example, each pip (depending on the currency pair) is worth about $1.

In all pairs involving the Japanese Yen (JPY), a pip is the 1/100th place -- 2 places to the right of
the decimal. In all other currency pairs, a pip is the 1/10,000 the place -- 4 places to the right of
the decimal.

(Created by Jeremy Wagner)

Youll see that the digits for pips are in a larger font. This makes them easier to see.
Additional transparency is provided through most electronic platforms as each currency pair is
quoted with precision to 1/10th of a pip. This fraction of a pip allows price providers to bring
spreads down even further as they are not restricted to quoting in full pip increments. This is
beneficial to you, the trader, because the spread is a component of your transaction cost.

Youll notice that earlier in this post, we mentioned that the value of a pip for a 10,000 unit trade
is roughly equal to 1 unit of your denominated currency (or $1 if you have a USD account).
Now, lets identify what the actual value per pip is.
For those who wish to determine the calculation by hand, follow this method below (if you are
not interested in the mathematics involved, then proceed to the next article).
First you start with the size of your trade. If you want the value of a pip for a mini lot, you start
with 10,000. You then multiply your trade size by one pip for the pair that you are trading.
In this example we are going to calculate the value of a pip for one 10k lot of EUR/USD.

So since I am using 10k mini-lot, Im starting with 10,000. I multiply 10,000 by .0001 since
1/10,000th is a pip for all pairs (except JPY pairs).
That gets me a value of 1. That will be valued in the counter currency (second currency) of the
pair that I am trading. In this example, I am trading EUR/USD, so USD is the counter currency
of the pair. One pip is worth 1 USD dollar for one 10k lot of EUR/USD.
If my trading account is based in US Dollars, then I will see $1 of profit or loss on my account
for every 1 pip move that the EUR/USD makes in the market.
Now, if my trading account is based in Euros (EUR), I would have to convert that $1 USD into
Euros. To do so, I just divide by the current EUR/USD exchange rate which at the time of
writing is 1.3797. Im dividing here because a Euro is worth more than a USD, so I know my
answer should be less than 1. 1 divided by 1.3797 is 0.7248 Euros. So now I know that if I have
a Euro based account, and profit or lose one pip on 1 10k lot of EUR/USD, I will earn or lose
0.7248 Euros.
Lets do another example of GBP/JPY.
Again well go with a one 10k lot trade.
This time a pip is .01 because it is a JPY pair.
10,000 times .01 is 100. Again, that 100 is in terms of the counter currency, so it is 100
Japanese Yen (JPY).
Now we need to convert that 100 Yen to the denomination of your account. If you have a USD
based account, then you take the 100 Yen and divide it by the USD/JPY spot rate, which at the
time of this writing was 105.11. That gets you an answer of $0.95 per pip.

The Basics of How Money is Made Trading

Forex
Trading currency in the Forex market centers on the basic concepts of buying and selling.
Let's take the idea of buying first. What if you bought something (it could literally be almost
anything...a house, a piece of jewelry or a stock) and it went up in value. If you sold it at that
point, you would have made a profit...the difference between what you paid originally and the
greater value that the item is worth now.
Currency trading is the same way...

Let's say you want to buy the AUDUSD currency pair. If the AUD goes up in value relative to
the USD and then you sell it, you will have made a profit. A trader in this example would be
buying the AUD and selling the USD at the same time.
For example if the AUDUSD pair was bought at 0.74975 and the pair moved up to 0.76466 at
the time that the trade was closed/exited, the profit on the trade would have been 149 pips. (See
the chart below)

Created using IGs web trading platform

Had the pair moved down to 0.74805 before the trade was closed, the loss on the trade would
have been 17 pips.
Also, it makes no difference which currency pair you are trading. If the price of the currency you
are buying goes up from the time you bought it, you will have made a profit.
Here is another example using the AUD. In this case we still want to buy the AUD but lets do
this with the EURAUD currency pair. In this instance we would sell the pair. We would be
selling the EUR and buying the AUD simultaneously. Should the AUD go up relative to the
EUR we would profit as we bought the AUD.
In this example if we sold the EURAUD pair at 1.2320 and the price moved down to 1.2250
when we closed the position, we would have made a profit of 70 pips. Had the pair moved up
instead and we closed out the position at 1.2360 we would have had a loss of 40 pips on the
trade.

Remember, we are always buying or selling the currency on the left side of the pair. If we buy
the currency on the left side, which is called the base currency, we are selling the one on the right
side which is called the cross or counter currency. The opposite would be true if we were selling
the currency on the left side.
Now let's take a look at how a trader can make a profit by selling a currency pair. This concept is
a little trickier to understand than buying. It is based on the idea of selling something that you
borrowed as opposed to selling something that you own.
In the case of currency trading, when taking a sell position you would borrow the currency in the
pair that you were selling from your broker (this all takes place seamlessly within the trading
station when the trade is executed) and if the price went down, you would then sell it back to the
broker at the lower price. The difference between the price at which you borrowed it (the higher
price) and the price at which you sold it back to them (the lower price) would be your profit.
For example, lets say a trader believes that the USD will go down relative to the JPY. In this
case the trader would want to sell the USDJPY pair. They would be selling the USD and buying
the JPY at the same time. The trader would be borrowing the USD from their broker when they
execute the trade. If the trade moved in their favor the JPY would increase in value and the USD
would decrease. At the point where they closed out the trade, their profits from the JPY
increasing in value would be used to pay back the broker for the borrowed USD at the now lower
price. After paying back the broker, the remainder would be their profit on the trade.
For example, lets say the trader shorted the USDJPY pair at 122.761. If the pair did in fact move
down and the trader closed/exited the position at 121.401, the profit on the trade would be 136
pips.

Created using IGs web trading platform

On the other hand, if the pair was shorted at 122.761 and the pair did not move down but rather it
moved up to 122.951 when the position was closed, there would be a loss on the trade of 19 pips.
In a nutshell, this how you can make a profit from selling something that you do not own.
In wrapping up, if you buy a currency pair and it moves up, that trade would show a profit. If
you sell a currency pair and it moves down, that trade would show a profit.

Reading a Forex Quote

Quoting Convention
Quotes in the currency market can be a bit confusing because any position you take in the market
is actually two different positions.
In FX youll see currencies listed in Pairs. This permits you more options in FX then you get in
other markets. For example, you may be bullish on Euro and will therefore buy want to buy the
Euro. In FX, you can chose what you want to buy those Euros with. You can buy them with
USD, or you can buy them with JPY if you prefer. You can buy Euros with a long list of other
currencies that we offer.
So a currency pair will be displayed in this manner.
EUR/USD
The first currency listed is referred to as the base currency. The second currency listed is
considered the counter currency. So for EUR/USD, the Euro is the base currency and the US
Dollar is the counter currency. If the pair is trading at 1.4700, that quote tells us how much of the
Counter currency it would cost to buy one unit of the base currency. So it would cost $1.47 US
to buy one Euro.
When it comes to placing a trade, keep in mind that any time you take a position you are doing
so in terms of the base currency. So if you buy a pair, you are buying the base currency. If you
sell a pair, you are selling the base currency. Then its easy to keep in mind that you are always
doing the opposite with the counter currency. So, if you buy EUR/USD, you are buying Euros
and selling US Dollars.
If that is still a bit too confusing, you can think of it simply this way. Buy if you expect the rate
to go up. Sell if you think the rate will go down. Simple as that!
You will always see a two-sided quote in FX. In your account you will always be shown a Buy
price and a Sell price. They can also be referred to as the bid and ask respectively. The Buy
price is the rate that you can buy that pair at, and the Sell price is the rate at which you can sell

that pair. The difference between the two prices is called the spread. The spread is determined
by the price providers and liquidity in the markets at that precise moment.
A spread exists for all tradable instruments, stocks, bonds, futures, options, etc, it just isnt
always visible to the trader.
So now you hopefully understand how currency pairs are quoted and what you are buy and what
you are selling when you place a trade.

Currency Names and Symbols

As you may have noticed, the symbols (abbreviations) for all currencies have three letters. The
first two letters denote the name of the country and third letter stands for the name of that
countrys currency.
As an example, lets look at the USD. The US stands for United States and the D stands Dollar.
The currencies on which the majority of traders focus are called the majors. The most widely
traded currencies are represented on the grid below:

Not to be confused with major currencies are the major currency pairs. The Major Pairs are any
currency pair with USD in them. For example, the EURUSD would be considered a Major Pair.

Currency pairs without the USD in them are referred to as Cross Pairs. The EURJPY would be
an example of a Cross Pair.

To carry this one step further, any EUR pair without the USD in it would be referred to as a Euro
Cross. So the EURJPY would be a member of the EURO Cross group. Other member of that
group would be EURGBP, EURCHF, EURNZD, EURCAD and EURAUD.
Other currency groups of this type would be comprised of the JPY crosses, GBP crosses, AUD
crosses, NZD crosses and the CHF crosses.

Understanding the Forex Majors

Talking Points

Foreign exchange rates are quoted in pairs

The Majors, refer to actively traded Forex currencies
Major Pairs reference major currencies coupled with the USD

By now you probably know that foreign exchange rates are quoted in pairs. While this is
important, it is also imperative to know exactly which currencies are being referenced in these
pairs. Whether you are preparing to place your first trade or are a seasoned pro analyzing
extensive research having a firm grasp on which currency is which will ultimately influence your
decisions.
To help today we will review the Forex market Major Currencies and Pairs.
The Majors
When trading Forex, it is inevitable that traders will run across currencies known as The
Majors. This term is in reference to the most frequently traded currencies in the world, with the
list normally including the Euro (EUR), US Dollar (USD), Japanese Yen (JPY), Great British
Pound (GBP), Australian Dollar (AUD), and Swiss Franc (CHF).See the graph below, and you
will find a list of the Major currencies along with their associated country and ISO symbol.
The Symbol is how you will know exactly which currency you are trading when referencing a
Forex Bid/Ask quote. However, it is also important to review each currencies nickname. These
names will often come up in research and will be handy when communicating with other Forex
traders.

Major Currency Pairs

Next we will take a look at currencies pairs that are considered Major Pairs. The Major Pairs
are a reference to any of the major currencies listed above when paired with the USD. For
example, the EURO is considered a major currency, but when paired with the USD (EUR/USD)
the quote becomes a reference to a major pair.

All about Currency Crosses

Foreign exchange rates are quoted in pairs

Major Pairs reference major currencies coupled with the USD
Cross Pairs reference major currencies coupled with a non USD currency

Foreign exchange ratesare quoted using two currencies, which then are combined to create a
currency pair. The majority of these pairs are created using the G-8 currencies listed below
which are then divided into two classifications, Major Pairs and Cross Pairs.
Today we will continue our review by briefly explaining exactly is meant by a currency cross.

Currency Cross Pairs

Major Pairs are considered when any of the Major G8 currencies are coupled with the USD,
such as the EURUSD. A cross pair is one that does not include the USD. These currency cross
pairs were created to ease the process in which traders could exchange money. Not only were

transactions simplified without first having to convert to USD as a common medium, but now
traders can also trade while avoiding USD volatility.
The other major benefit to trading cross pairs is for their strong trending markets. One example
of a currency cross pair is the EURAUD. For the 2013 trading year the EURAUD moved a total
of 3378 pips from low to high. This is nearly 4x the movement of the EURUSD! The EURUSD
major only managed a move 848 pips, measured from low to high for the 2013 trading year.
Other cross pairs for the Euro includes the EURGBP, EURAUD and EURJPY to name a few. So
remember next time you open your platform there are opportunities outside of the majors, and
look for the currency crosses.

How to Trade a Synthetic Currency Pair

Based on liquidity, not all currencies are matched for trading

Two USD currency pairs can be linked to create a third synthetic pair
Be creative in your synthetics but always monitor spreads and interest

It is imperative that new traders in the Forex market become familiarized with currency pairs and
The Majors. While this is always a good place to begin your learning, what happens when you
want to trade a non USD currency cross? If you are looking to trade pairs such as the exotic
EUR/MXN (Euro / Mexican Peso), the answer will be through the use of a synthetic currency
pair.
To help, today we will review the basics of a Synthetic currency pair and how you can create
your own inside of your trading platform.
Synthetic Currency Pairs
So what exactly is a synthetic currency pair? A synthetic currency pair is one that is not listed, or
not carried by brokers and other liquidity providers. Normally these pairs are not carried due to
thin trading activity as a result from limited economic activity and capital flows between the two
respective economic regions. However, even though a currency pair isnt listed doesnt mean
you cant create your own! A synthetic currency pair is created when we use two alternative
pairs to create a third unique currency pair!
Now lets learn how to create a synthetic currency of our own.
Creating a Synthetic
Traders can create virtually any Synthetic currency through trading two separate USD positions.
For example earlier in the article, we mentioned a trader may want to trade the EUR/MXN
currency pair. While this pair is not actively quoted, it can be replicated by trading both the
EUR/USD and USD/MXN currency pairs.

In this scenario, if a trader wants to BUY the EUR/MXN, the EUR/USD should be bought
putting the trader Long Euros and Short US Dollars. Then the USD/MXN can also be bought,
adding a Long US Dollar position and Short Peso position in the mix. Once this is done the
Dollar positions effectively cancel each other, leaving the trader Long Euros and Short Pesos!
As seen in the image below, this process can be replicated to also create a synthetic Sell position
on the EUR/MXN.

Costs of Trading Synthetics

As with any currency transaction there is a spread associated with creating a synthetic currency
trade. Since you are opening two individual positions to create a third synthetic trade there will
be a spread associated with each transaction. As well traders should consider the interest rate
differential between the countries they are trading between. Since there are three countries
involved in a synthetic currency transaction this should be monitored as it may negative or
positively affect the trades profitability.

Trading the Euro - EURUSD

When FX Traders first come to trading platforms, their interest is almost universally drawn to the
same vehicle.
This vehicle is typically highlighted, stands out, and is noted as the EURUSD.
The reasons for this popularity make sense. Europe and The United States represent the two
largest economies in the world. While the US Dollar remains the worlds most popular reserve
currency, the fast rise of the Euro to international prominence brought it to the worlds second
most common reserve currency; and this was in an extremely short amount of time.
How Have Traders Fared in EURUSD?

Unfortunately, this rampant popularity in the currency pair hasnt equated to profits for traders
speculating in the currency pair .The graph below will show the five of the most popular
currency pairs, plotting the profitability of traders (running up/down on the left side of the graph)
at various times throughout the day (plotted horizontally along the bottom of the graph).
EURUSD is represented by the blue line.

As you can see, EURUSD is actually the least profitable pair at many times throughout the day,
despite its raving popularity.
Notice that profitability seemed to be far lower on EURUSD during the very active market hours
(from 4AM EST to 2PM EST). This is an important point, as this is shortly after London, the
largest FX market center in the world, opens for the day and brings a massive amount of volume
into the market.
When the US opens for business at 8 EST, more volume is introduced as The United States is the
second largest FX market center. Notice that profitability for traders in EURUSD seems to
bottom shortly after the US Open (8-11 AM EST).
From the research, it appears as though as volume and market activity increase trader
profitability in EURUSD decreases, and decreases more-so than what was seen in the other most
commonly traded currency pairs.
Trading EURUSD
Given the information we have on how traders have fared in the past, we can build an approach
based on what has or has not worked for other traders in the past.

The first point of emphasis is that while traders may have been worse-off trading EURUSD
during the very active times of the day (The London and US sessions); profitability on EURUSD
is actually above or near 50% for much of the Asian Trading Session.
As a matter of fact, after The United States closes for the day at 5:00 EST (shown as 17:00 on
the graphic), trader profitability stays above 45% until London opens the next morning.
For traders wanting to speculate on EURUSD, the Asian trading session may be more
accommodating than the active hours of the day.
One of the primary reasons for this may be in the fact that the Asian session typically sees
smaller price movements than what may happen during the very active times of the day. Support
and Resistance, generally speaking, will see much more respect during the slower Asian trading
session.
In When is the Best Time of the Day to Trade Forex David Rodriguez looks at exactly that, and
finds that the average movement of the EURUSD currency pair is far smaller than during the
Asian trading session than during the active hours of the day.

Prepared by David Rodriguez for the Traits of Successful Traders Series

Because of these slower price movements and the fact that support and resistance will have a
greater tendency to be respected, traders may find range trading approaches on the Euro-Dollar
to be most accommodating during the Asian Trading Session.
Once a trader knows they want to take a range-based approach on the pair, filling in the strategy
can be simple..
In How to Analyze and Trade Ranges with Price Action, we looked at a mannerism of trading
ranges using only price inflections and swings, no indicators necessary. By taking an approach

such as this, you can locate the support or resistance in the market as the Asian session opens,
and look to buy when price is at or near support; and look to sell when price is at or near
resistance:

In the JW Ranger Strategy, Jeremy Wagner brings price action together with the Commodity
Channel Index, or CCI, to decide when exactly he might want to trigger into a position.
What if I Cant Trade the Asian Session?
Given the 24-hour nature of the FX market, and considering that to many FX traders from
Europe and the United States, the Asian session is still considered off-hours, this was a
common reason why traders didnt look to trade when the market may be more accommodating
to their goals.

Trading the Cable - GBPUSD

One of the oldest and most popular currency pairings in the world is the British Pound v/s the
United States Dollar.
Speaking directly to this quality, the name The Cable comes from the first transatlantic cable
that was laid across the floor of the Ocean for the United States and Great Britain to
communicate with one another.
One of the primary pieces of information exchanged on this first transatlantic cable were
currency quotes on the two currencies.
A lot has changed since that first Trans-Atlantic cable was placed on the floor of the Ocean, but
the GBPUSD currency pair continues to remain a favorite to traders around the world.

This article will take a closer look at this pair, and how traders may want to build their approach
in trading The Cable. At the end of the article, well also enclose 2 strategies for trading in
GBPUSD.
Characteristics of the GBPUSD
The reasons for GBPUSDs popularity are abundant. The United Kingdom and the United States
represent two of the oldest, modern economies in the world. Both economies feature a relative
amount of safety, due in large part to the sheer size that each represents to the overall global
economy. Below is a listing of the worlds 10 largest Independent economies (using 2011 IMF
Statistics, in Millions of US Dollars):

Gross Domestic Product in 2011 per the International Monetary Fund

Perhaps a larger contributing factor to interest in the GBPUSD currency pair is the fact that
London is often considered to be the center of the Forex trading world.
Estimates approximate that 35% of volume traded in the FX Markets takes place through
London. This is the period just before the United States opens for business, leading to some of
the most liquid trading times of the day.
As we saw in the article Here is How to Trade Majors like the Euro During Active Hours, these
market periods can potentially see larger moves as major players in-and-around London enter the
market as the UK opens for business.
This can greatly affect the traders approach during the London Session, and more specifically
in trading the GBPUSD currency pair.

Created by James Stanley

Strategies for Trading GBPUSD
Before deciding on the way that you want to trade The Cable, you should probably answer
another question first.
When are you planning on trading?
As we found in the our coursef Successful Traders series, the different trading periods in the
market can exhibit markedly different tones.
The Asian Session(s) from Sydney and Tokyo have a propensity to be more accommodating for
Range-Trading approaches, as hourly moves are in general smaller than what we may see
during the more active London and US sessions.
Range-Trading approaches often look to buy when price is cheap and at support; and sell when
price is expensive, or at resistance. There are quite a few different ways of doing this. In the JW
Ranger Strategy, Commodity Channel Index, or CCI. In How to Analyze and Trade Ranges
with Price Action, I walked you through a way of trading ranges without needing any indicators
at all; using only price to point out pertinent areas of support and resistance for building our
approach.
For traders looking to trade GBPUSD during the more active times in the market, when liquidity
is coming from Europe and the United States, breakout trading may be more accommodating.
With breakouts, traders are watching support and resistance, much like in the Asian session. But
differing from the Asian session, support and resistance may be broken much more frequently as

the onslaught of liquidity entering the market can potentially push price in one-direction for an
extended period of time.
Below is a picture of a breakout on the AUDUSD currency pair:

Created by James Stanley

As you can see above, price resisted twice at a price just shy of .9880, but on its third attempt
was able to breakout and run for an extended period of time.
This is what traders speculating during the London and US sessions should be looking for.
Trading Breakouts on GBPUSD
For traders looking to trade breakouts on GBPUSD, there are, once again, quite a few ways of
doing so. A key component of trading breakouts is looking for strong risk-reward ratios, such as
the trader risking 20 pips, but looking for 100 pips if correct. This could be classified as a 1-to-5
risk-to-reward ratio (20 pips at risk 100 pips sought = 1:5 risk-to-reward).

With a risk-reward ratio so aggressively on the traders side, one would need to be right only 2
out of 5 times to gleam a net profit. If a trader was right 40% of the time with a 1-to-5 risk-toreward ratio, they could be looking at a handsome profit ( 2 winning trades at 100 pips each =
200 pips won, 3 losing trades at 20 pips each = 60 pips lost, net profit of 140 pips (200-60) not
including commissions, slippage, etc).
In How to Identify Positive Risk-Reward Ratios with Price Action, we looked at mannerisms
for finding and calculating risk amounts. The same mechanism used in that article, identifying
previous swing-highs for short positions, or looking for previous swing-lows for long
positions can be used to identify areas to place stops in breakout strategies.
However, since traders are looking for new highs or new lows with breakout strategies limits
or profit targets can be calculated simply by looking for a multiple of the risk amount (i.e., Im
risking 63 pips on this trade, so I will look for 5 times my risk amount (or 315 pips (63 X 5)) for
my profit target.
As for strategies to trade breakouts, traders can look to the Price Channel indicator, looking for
breaks of the highs and lows that were seen on the longer-term charts.
For traders looking to utilize Price Action in their Breakouts strategy, we looked at exactly that
in the article Price Action Breakouts.
Whatever your mechanism for identifying support and resistance; looking to trade breaks of
these levels during the active period(s) of the day while looking for price to respect these levels
during the more quiet periods will generally bring the trader more robust results, in GBPUSD or
any of the other major currency pairs.

Trading the Dragon: GBPJPY

The British Pound Japanese Yen currency pair is a volatile offering that presents traders with
potentially large moves in price relative to many other pairings. This currency pair is, at times, so
volatile that it has earned the nickname of The Dragon, as well as another well-coined term:
The Widow-maker.
Whatever you call it, the fact remains the same: GBPJPY can really move.
Take, for instance, the initial throws of the Financial Collapse in 2008. While the EURUSD had,
at one point, gone down by ~3300 pips, the top-to-bottom move on GBPJPY was much larger: at
one point a loss of more than a staggering 7000 pips.

Created by J. Stanley
This volatility can be a good thing, or it can be a very bad thing; depending on how you trade.
DailyFX Traits of Successful Traders
Exhaustive research was performed by DailyFX Quantitative Strategist David Rodriguez,
examining more than 12 million trades placed by live traders. The goal of the research was to
find out how traders were speculating, what wasnt working, and what we, as an education and
research group, could do to help.
The results of the research are shocking, and what was found was that the Number One Mistake
that FX Traders Make often revolves around risk-reward ratios; that is, how much is lost on
losing trades against how much is profited on winning trades.
From the research, David states:
Traders are right more than 50% of the time, but lose more money on losing trades than they
win on winning trades. Traders should use stops and limits to enforce a risk/reward ratio of 1:1
or higher.
GBPJPY is an extreme example of this fact.
From our research, we can see that traders are correct a whopping 66% of the time on GBPJPY!

Prepared by David Rodriguez for the Traits of Successful Traders series

But exactly as David had found in the research, this robust winning percentage didnt translate
into profits; as traders took far larger losses when they were wrong than profits when they were
right:

Prepared by David Rodriguez for the Traits of Successful Traders series

Traders win, on average, 52 pips on GBPJPY trades when they are right; but when they are
wrong, they lose a monstrous 122 pips. From the above chart, GBPJPY is showing the lowest
ratio of pips won v/s pips lost (on average).
This type of risk-reward ratio puts traders in a precarious position; as to be profitable over the
long-term one would have to be right about 75% of the time (3 out of 4) to be able to hope for a
net profit.
I dont know about you, but there are very few things in life I want to expect to be right 75% of
the time with; least of all anything that could cost me money when I am wrong.
Trading GBPJPY
Trading a currency pair like GBPJPY could be optimal for traders looking for volatility or large
moves; but it should be noted that those moves arent always very smooth; which is exactly why
overall profitability wasnt higher on the pair.
The first point of emphasis is that given the above points, trading in GBPJPY should always
entail a protective stop-loss order. Lack of doing so exposes the trader to significant risks as the
pair may trend for an extended period of time.
Due to this volatile nature, and given the fact that the pair could trade with very wide swings in
either direction, breakouts can be an attractive approach when trading GBPJPY. This will allow
traders to maximize profits on the large swings when they are right; while also allowing them to
cut their losses short as the big swings move against them.
With breakout strategies, traders are monitoring support and/or resistance; waiting for a break of
the price level with the expectation that once the break is made price will continue running in
that direction, allowing for the maximization of profits in instances when the trader is correct
(which is yet another reason stop losses are important, as those extended moves can cost
significantly in instances when the trader is incorrect).
In the article Price Action Breakouts, we looked at a mannerism for trading price-breaks
without the necessity of any indicators at all, using price alone to denote support and resistance
levels.
In the article, Breakouts: How to Stay Away from Some Losing Trades, Jeremy Wagner
introduces another indicator, price channels aka Donchian Channels, to help monitor price levels
that may warrant future breakout opportunities.
For traders speculating in -denominated currency pairs, Ichimoku may also be a relevant
manner of analysis. Ichimoku is a popular technical system that was developed in Japan before
World War II. Its staying power as a popular mechanism for initiating trades has continued, as
the system is still widely in use today.

Ichimoku is often used as a trend-following system, but with a slight modification can be used to
trade in breakout-style scenarios.
A large part Ichimoku is The Cloud, which is a moving area of support or resistance plotted on
the chart. When price breaks through either side of the cloud, the trader can often look to trade
breakouts by placing a trade in that direction.

Trading The Aussie - AUDUSD

Trading the Aussie AUDUSD
In this article, we are taking a closer look at Australian Dollar/US Dollar currency pair. After we
examine how The Aussie made its way to current price levels, well provide a framework for
trading it.
The Australian Dollar, commonly called The Aussie is the national currency for the country
and continent of Australia, and one of the favorite vehicles of traders around the globe.

A$100 Note known colloquially in Australia as Jolly Green Giant

In 2012, AUDUSD became the 3rd most popular currency pair in the world, jumping up 2 places
from only 2 years before. High interest rates from Australia coupling very strong long-term
growth, a robust trading relationship with China and large deposits and exports of natural
resources combine to make this a favored asset amongst traders.
One needs only to look at the trend put in by the pair over the past decade to see why:

Created by J. Stanley
Since 2001 The Aussie has enjoyed a rigorous up-trend that saw its only major test during the
2008 Financial Collapse. Outside of that period, there was most definitely a one-sided bias in the

currency pair. Something interesting is happening of late, as the up-trend appears to be

congesting, but well get in the last section of the article for Trading the Aussie.
Why Did the Aussie Trend so Hard for so Long?
A number of factors contributed to the gains in Australia, key of which were:
1. High Interest Rates set by the RBA to moderate the inflation that was created from strong
growth
2. Strong growth brought upon by heavy natural resource and commodity deposits that were
being mined, and exported from Australia
3. Increasing commodity prices brought upon by even stronger growth from China and
India; both of which are key trading partners of Australia
4. The aforementioned stronger growth rates being seen in China and Australia only
increased the demand for the commodities that Australia was mining and exporting
The economy of Australia had a fairly bullish cycle of events working in its favor, and these are
just some of the reasons that traders flocked to the Aussie.
The fact that the RBA is one of the few large Central Banks that hasnt embarked on some form
of government intervention in the past 10 years also helps attract FX traders. Intervention efforts
can amount to a financial sucker-punch for traders; unexpectedly reversing strong trends with (or
maybe even without) announcements out of the blue.
Australia is one of the few large economies to retain the highest AAA Debt rating, speaking to
the political and economic stability that's been seen in the country and yet another contributing
factor to the currencys rising popularity amongst traders.
Trading the Aussie
Because of the high interest rate differential between Australia and the United States, the Aussiedollar remains a favorite of traders seeking volatility.
During bullish market environments, the AUDUSD can run up faster than many pairs due to its
interest rate differential.
During bearish market environments, AUDUSD can fall much faster than many pairs due to its
interest rate differential.
In many ways, the Aussie-dollar can offer characteristics similar to high-beta stocks, in which
market movements are exaggerated by additional volatility.
Due to the volatile nature of the currency pair, breakout strategies may work best during trending
markets. With breakout strategies, traders are monitoring support and/or resistance; waiting for a
break of the price level with the expectation that once the break is made price will continue

running in that direction, allowing for the maximization of profits in instances when the trader is
correct.
The picture below will illustrate a breakout on the AUDUSD currency pair as it was initially
attempting to make its way over parity.

.
Jeremy Wagner exhibited another mannerism of trading breakouts in the article How to Trade a
Breakout Strategy on the EURUSD, in which he investigated a breakout sell entry on EURUSD.
Interesting to note that price on the pair is now ~1500 pips lower since that article was published.
As we saw above, AUDUSD can be more volatile than EURUSD; and as Jeremy and David
investigated breakouts on EURUSD in the above references, Aussie can most certainly be used
in the same mannerism; as traders are looking for the bigger moves the market may bring while
allowing those moves to continue in their favor.

Trading the Yellow Metal - Gold

Gold (XAU/USD) has been used as a medium for exchange and a store of value for thousands of
years. Normally known as a slow moving asset, gold began the last leg of its rally during the

2008 financial crisis. From the 2008 low, gold has rallied as much as 181% to its current all-time
high at 1920.80. Price is currently finding support at 1,522.50 after a 20% decline only a year
after a peak was established.
With these sharp movements occurring in such a relatively short period of time, gold often leaves
traders with more questions than answers. Today we will be looking at the fundamental factors
currently driving the gold market.

Safe Haven Status

With a modern fiat currency system, Gold has lost much of its use for exchange and payments
for goods. That doesnt mean the asset doesnt have its uses. Gold is now seen as a safe haven
investment and used as a store of value. Traditionally investors have parked their funds in gold in
order to retain their value and purchasing power. During the financial collapse of 2008 many
central banks around the world, such as the Fed in the United States, stepped in to add liquidity
(supply of Dollars) to financial markets to stimulate lending and purchasing. This program
known as quantitavie easing, increased the assets on the Feds balance sheet, and by default
weakend the purchasing power of the Dollar. As the USD weakened commodities and gold
rallied.
Trading Gold
Trading a commodity like Gold it is always important to view the denomination that a
commodity is traded in. XAG/USD is based in the US Dollar, and is quoted in Dollars per oz.
This means the price of gold is directly impacted by the price of the USD. Below we see Gold
compared to the USDollar. These two assets are inversely correlated, meaning they will head in
opposing directions. If the USDollar is heading up, expect Gold to be trading down.

This information is very useful to traders that have a general fundamental view of the market. If
you have an opinion on Gold or the US Dollar this can be relayed into a trade idea. Often traders
that are bullish on Gold choose to trade the AUDUSD instead of the metal itself. The Aussie
Dollar carries a 3.50% banking rate, meaning traders can earn additional interest while executing
a buy order on a positively correlated opinion of Gold. If a trader is bearish on the AUDUSD
currency pair, traders can in turn sell gold to avoid accumulating interest on their trading
balance.

Current Price
Bellow we can see the current price action on gold (XAUUSD) using a daily chart. The market
can be seen consolidating in a triangle pattern between support and resistance. The market has
been effectively on hold for the last 10 months neither making new highs or lows as we wait on
new economic policy to influence direction. Either a new federal easing program or a resumption
ofUSD strength could push the asset out of this pattern. Until this time, traders can elect to set
entry orders waiting for a breakout or elect to trade the interior of the triangle.

The US Dollar: The Worlds Safe-Haven

As we often see in the carry trade, investors acting rationally in normal market environments will
follow yield. Meaning, if all factors are equal and you are given a choice between an investment
paying one percent and an investment paying five percent most rational people will choose the
five percent option.
This article will examine the whats and whys of the times when you might want to pick the one
percent investment instead.
One look at the AUDUSD chart from 2010, which saw lows of .8000 move up to 1.1000, the
entire period of which positive rollover was being accrued for holding long positions in the pair,
will confirm the fact that, typically, investors will follow yield.

Created by James Stanley

But what happens when the market environment isnt normal?
Such as the 2008 Financial Collapse...or the Tech bust or the S&L crisis?
These are just three of the bigger and more recent examples, but you probably see where this is
going: While a five percent investment will often be more attractive than the one percent
investment once the question of losing your investment altogether comes into play, the safety
of each option becomes all the more important.
As a matter of fact, if you look at the above chart youll notice it wasnt all roses and daylight for
The Aussie in 2010. Ill post the chart below from a different angle than we had looked at
previously:

Created by James Stanley

Relative Safety
While the thought of an entire economy such as Europe, or Australia going bankrupt may seem
ludicrous, we have to realize that investors, in all of their fashions whether they are hedge fund
traders or central bankers all hate to lose money.
And through the tests of time, the United States Treasury Bill has proved to be one of the safest
financial instruments the world has ever seen.
In the article, How Treasuries Impact Forex Capital Flows we saw exactly that; how traders in
panicking markets will often choose return of capital, over return on capital.
The above chart illustrates this: If investors are fearful of a recession they will buy US Dollars
despite the fact that any potential returns may be minimal. They are instead choosing safety
over profit potential. They can then invest those US Dollars into Treasury Bills, and despite the
fact that they may have smaller profit potential there is also a far smaller risk of actually losing
their investment.
Because if I can earn a rollover payment for holding the position at 5 Oclock today but the
trade loses more money than I make in rollover what is the point?
So if there is perceived economic weakness, investors may run to US Dollars in an attempt to
avoid the chaos. This is often called a flight-to-quality, or a safe-haven run.
A strengthening currency, much like what weve seen in Switzerland or the ravaged economy of
Japan, can rapidly change the balance of payments and cost a country greatly. But because of the

sheer size of the United States economy, investors continue to look for ways of safely parking
money so that it may not be exposed to principal risk.

Trading Around the Dollar

Trading Around the Dollar
Traders around the world are increasingly confounded as to how to trade the US Dollar. After
multiple scares and momentum shifts pertaining to debt limits, potential Quantitative Easing, and
of course soverign debt downgrades, many folks are throwing up the white flag on the
Greenback and instead choosing to speculate on cross pairs such as EUR/AUD, GBP/NZD, or
perhaps even EUR/CHF.
Focusing on cross pairs (that do not include the US Dollar) can be an extremely prudent strategy
in markets in which the US Dollar looks like this:

Chart by James Stanley

By avoiding the US Dollar, traders can potentially focus on strong trending moves that can be
found in the aforementioned cross pairs.
But what if the trader was adamant about trading the US Dollar? Perhaps its because of the
liquidity behind Dollars, or maybe the trader was welcoming the increased volatility that the
Greenback is showing us?
To those traders formulation of strength analysis can add a large arrow in their trading quivers.

By noticing that the NZD/USD currency pair is in the process of formulating an all-time high
(currently sitting 70 pips from this level), traders can gleam that in the event of US Dollar
weakness; being long the Kiwi-Dollar might not be a bad place to be.

Chart by James Stanley

Now that can be great if the US Dollar is weakening; but as we saw in the first chart of this
article the US Dollar also has the propensity to strengthen. What pair can the trader look to in
these events?
Once again, Im going to draw to the strength analysis that Ive performed. During a good
portion of the US Dollar volatility we looked at earlier, the Euro Zone faced quite a few
hardships in regards to the sovereign-debt of their nation-state constituents. As a matter of fact,
when I perform my strength analysis, the Euro consistently comes up towards the bottom of the
list of my strong competitors.
Lets take this point a little further.
If the US Dollar is strengthening, what situations are we generally looking at as a trader? We
know that rate hikes out of the US are probably not coming any time soon (given recent verbiage
from Bernanke). We also know the fundamentals of the US economy dont look so bright

(confirmed by speeches last week given by Bernanke). So the primary situation in which we will
probably be seeing US Dollar strength would be a flight-to-quality, in which traders eschew
higher rates of return instead for safety of principal. Those are the panic situations we discuss
in the DailyFX+ Trading Room.
In that situation I want to be short on Euros or short the economy with the highest potential
for showing us bad news. In these events, I want to look to short the EUR/USD currency pair to
take part with my fellow traders in this flight-to-quality.

Big Trading Opportunity in Worlds SecondLargest Economy

China is the worlds second-largest economy and its economic growth far outpaces major
industrialized counterparts. Yet its domestic currency, the Chinese Yuan, is not a truly
international currency. Here is a guide on using the USDCNH to trade the uptrend in the Chinese
Yuan.
China is the second largest economy in the world, while its currency Renmnibi is not yet a truly
international currency. Yet with the fast developments in Chinas financial system, more Chinese

currency products such as offshore futures have been and will be launched overseas. Investors
are likely to be able to trade in a new global currency competing with the dollar and the euro in
the near future.
Get to Know the Key Terms
Before investing in this new opportunity, traders will want to understand some key concepts first.
China s currency is officially called the Renminbi, Peoples Currency literately. The Yuan is the
unit of account, similar to the dollar, so Chinas currency also can be called as the Chinese Yuan.
Renminbi, denoted RMB is the name for the currency traded both onshore and offshore.
If the RMB is traded onshore (in mainland China), it is referred to as CNYtraded as
USD/CNY.
If the RMB is traded offshore (mainly in Hong Kong), the ticker will be USD/CNH. Thus, RMB
is one currency but trades at two different exchange rates depending on locations.
Current RMB Exchange Rate and Markets
Many investors may ignore this potential opportunity as they believe RMB is fixed to the US
Dollar. It is partly true. Unlike the U.S. dollar or the Euro, the RMB is not fully-pledged simply
based on market supply and demand; instead, the trading price of RMB is managed floating
within a range of 0.5 percent around the central parity published by the Peoples Bank of China.
The central parity is determined by a basket of foreign currency including the US dollar, Euro,
Japanese Yen and other currencies.
The good news for traders is that despite of controlled volatility, the intrinsic value of RMB is
indeed affected by economic forces in the market. Both hedgers and speculators may take
advantage of RMB trading.
In the domestic RMB market, the main players are onshore exporters, who demand CNY and sell
the US dollar, and importers pay US dollar with CNY. On the other side, most speculators
participate in the offshore currency market via the USDCNH in Hong Kongs markets. As the
demand for CNH usually exceeds supply, which is suppressed by government regulation, the
CNH is generally trading above the value of CNY.
Regulator in Focus: Peoples Bank of China
The Central Bank of China plays the most important role on formulate policy on the RMB
exchange rate and also on the reforms to increase the role of Chinese Yuan on the world stage.
Investors will want to keep an eye on it to gauge any clues on fundamental changes and the
timing for the Chinese Yuan to become a truly global currency.

In order to keep currency volatility within the expected range, PBOC, the largest currency trader
in China with over $3 trillion foreign reserves, purchases or sells the US Dollar in the open
market.
Historical Chart for Offshore RMB Exchange Rate versus US Dollar (USD/CNH )

Since the height of the global financial crisis in 2008, China has intensified efforts to promote
the RMB as an international currency. Yet more important questions to potential investors are
when and how the process will take place. In order to predict future, we first need to review
history first in order to determine the critical timing for changes in the Chinese Yuan.
The Renminbi was first issued on December 1, 1948 and soon pegged to the US dollar with
USDCNY at approximately2.46Yuan. At that time, China had little international trade so the
setup of exchange system remained in in relative infancy.
As imports and exports continued to increase sharply, China adopted a double currency system
starting in 1981: regardless of the official exchange rate, a US Dollar at 2.80 Yuan was used for
trade settlement.
From 1994, the Chinese government pegged the RMB to the greenback within a narrow range
from 8.27 Yuan to 8.28 Yuan. The fixed exchange rate guaranteed a relatively stable financial
market and helped protect against external shocks as Chinas economy expanded at a fast pace.

On July 21, 2005, the Peoples Bank of China announced that it would lift the peg to the US
dollar and increased flexibility of RMB exchange rate. Following the release, RMB appreciated
by 2 percent to 8.11 Yuan. As the use of Chinas currency expanded from trade settlement to
offshore financial markets and direct investment, RMB reform and internationalization has
accelerated with a market-oriented focus.

The Long and Short of it

Aspiring traders will often be familiar with the concept of buying to initiate a trade. After all,
since many of us are children we are taught the basic premise of buying low, and selling high.
In financial markets, jargon often plays a key role. Jargon helps show familiarity and comfort
with a particular subject matter, and nowhere is this jargon more apparent than when discussing
the position, of a trade.
When a trader is buying with the prospect of closing the trade at a higher price later, the trader is
said to be going Long, in the trade. The following graphic will illustrate the dynamic of a long
position:

Created by James Stanley

While this premise may seem easy enough, the next may be slightly more unconventional to new
traders.

The concept of selling something that isnt already owned may prove as a confusing concept, but
in their ever-evolving pragmatism traders created a mannerism for doing so.
When a trader is going Short, in a trade, they are selling with the goal of buying back (to cover
the trade) at a lower price. The difference between the initial selling price, and the price at which
the trade was covered, is the traders profit to keep less any fees, commissions, or selling
expenses. The chart below illustrates a Short, position.

Created by James Stanley

Its important to note the interesting distinction between currencies and other markets. Because
currencies are quoted with two sides (each quote references 2 different currencies taking
opposing positions), each trade offers the trader long and short exposure in varying currencies.
For example, a trader going short EUR/AUD would be selling Euros and going long Australian
Dollars. If, however, the trader went long the currency pair they would be buying Euros and
selling Australian Dollars.

Profit in Falling Markets (Short-Selling

Basics)
New traders entering markets are often comfortable with the concept of buying when opening a
trade. After all, from the time many of us are infants, we are told to buy low and sell high.

Its easy to imagine how we might be able to profit from this endeavor. If we are able to sell
something at a price higher than we had purchased it, we get to keep the difference.
But financial markets are populated with opportunists that dont want to wait around for a low
price to find potential profits; and with traders willing to buy and sell at many intervals, there is
no reason to relegate opportunities to ONLY buying.
This is where Short-Selling comes in to play.
The term Short-Selling, often confuses many new traders. After all, how can we sell something
if we dont own it?
This is a relationship that began in stock markets before Forex was even thought of. Traders that
wanted to speculate on the price of a stock going down created a fascinating mechanism by
which they could do so.
Traders wanting to speculate on price moving down may not own the stock they want to bet
against; but likely, somebody else does. Brokers began to see this potential opportunity; in
matching up their clients the held this stock with other clients that wanted to sell it without
owning it. The traders holding the stock long can be doing so for any number of reasons. Perhaps
they have a really low purchasing price and do not want to enact a capital gains tax. Or perhaps
the investor holding long believes the exact opposite of the trader wanting to sell short?
Whatever the reason, an opportunity exists for the broker to play as a middle-man, in the
transaction, and make a fee for doing so.
The broker would go to the customer who had bought, and was holding a long position to
borrow, the shares.
You may have heard the term re-hypothecation, and thats where this comes into play. Traders
that have went on margin to buy the stock have often already signed a hypothecation
agreement, that allows their broker to use the shares purchased as collateral of the sale. With rehypothecation, those same brokers can use this collateral for their own purposes; such as letting
other customers borrow the shares to sell (without really owning).
The customer wishing to sell short could then borrow the shares from the broker, with the
promise to buy back to cover, at a later date and time. The hope of the trader is that they will be
able to buy back at a lower price, repay the loan with the exact number of shares that were
borrowed, and pocket the difference in prices.
If the trader is able to buy back the shares at a lower price, the difference between the price at
which the trader had initially sold the borrowed shares, and the new lower price the trader was
able to purchase the shares to cover the trade becomes the traders profit.
Short Selling in the Forex Market

In the FX Market, transactions are handled differently than stocks.

First of all, each currency quote is provided as a two-sided transaction.
This means that if you are selling the EUR/USD currency pair, you are not only selling Euros;
but you are buying dollars.
If you buy the GBP/JPY currency pair you are buying British Pounds and selling Japanese
Yen.
If you sell the AUD/NZD currency pair you are selling Australian dollars and buying New
Zealand dollars.
Because of this, no borrowing, needs to take place to enable the short sale. As a matter of fact,
quotes are provided in a very easy-to-read format that makes short-selling more simplistic.
Want to sell the EUR/USD?
Easy. Just click on the side of the quote that says Sell.
After you have sold, to close the position, you would want to Buy, the same amount (hopefully
at a lower price allowing for profit on the trade).
You could also choose to close a partial portion of your trade. Lets walk through an example
together.
Lets assume that we initiated a short position for 100k, and sold EUR/USD when price was at
1.29.
Let's assume the price has moved quite a bit lower. The trader, at this point, has the opportunity
to realize a profit on the trade. But lets assume for a moment that our trader expected further
declines and did not want to close the entire position.
Rather, they wanted to close half of the position in an attempt to bank profits, while still
retaining the ability to profit further on the remainder of the position.
The trader that is short 100k EUR/USD can then click on the Buy, side of the currency quote to
begin the trade closing process of 50k.
After clicking on Ok, our trader has bought 50k EUR/USD offsetting half of the 100k short
position that was previously held.
Our trader, at that point, would have realized the price difference on half of the trade (50k) from
their 1.29 entry price to the lower price they were able to close on.

The remainder of the trade would continue in the market until the trader decided to buy another
50k in EUR/USD to offset, the rest of the position.

The FX Spread
A quote consists of a buy price which is the offer and a sell price which is the bid. The difference
between the two prices is referred to as the spread. High volume pairs like the EUR/USD will
typically have tighter spreads than other pairs that don't generate as much trading volume. If you
think that the EUR is going to strengthen against the USD, you would buy the EUR/USD. If you
think that the EUR will weaken against the USD, you would sell the EUR/USD. This later trade
is referred to as shorting the market and involves no additional costs or restrictions in the FX
market. Since the direction of interest rates in a country does not change that often, the FX
markets are known for their long trending moves.
FX charts will typically show the sell price only on the charts. This can cause some confusion
when traders get stopped out of their sell trade with a protective buy stop and see on the chart
that the sell price never moved up to their buy stop level.
That is because of the spread on the pair.

What Does a Spread Tell Traders?

Spreads are based off the Buy and Sell price of a currency pair.
Costs are based off of spreads and lot size.
Spreads are variable and should be referenced from your trading software.

Every market has a spread and so does Forex. It is imperative that new Forex traders become
familiar with spreads as this is the primary cost of trading between currencies.
Today we will review the basics of reading a spread and what the spread tells us in regards to the
costs of our transaction.
Spreads and Forex
Every market has a spread and so does Forex. A spread is simply defined as the price difference
between where a trader may purchase or sell an underlying asset. Traders that are familiar with
equities will synonymously call this the Bid: Ask spread.
Below we can see an example of the spread being calculated for the EURUSD. First we will find
the buy price at 1.35640 and then subtract the sell price of 1.35626. What we are left with after
this process is a reading of .00014. Traders should remember that the pip value is then identified
on the EURUSD as the 4th digit after the decimal, making the final spread calculated as 1.4 pips.

Now we know how to calculate the spread in pips, lets look at the actual cost incurred by
traders.

Spreads Costs and Calculations

Since the spread is just a number, we now need to know how to relate the spread into Dollars and
Cents. The good news is if you can find the spread, finding this figure is very mathematically
straight forward once you have identified pip cost and the number of lots you are trading.
Using the quotes above, we know we can currently buy the EURUSD at 1.3564 and close the
transaction at a sell price of 1.35474.That means as soon as our trade is open, a trader would
incur 1.4 pips of spread. To find the total cost, we will now need to multiply this value by pip
cost while considering the total amount of lots traded. When trading a 10k EURUSD lot with a
$1 pip cost, you would incur a total cost of $1.40 on this transaction.
Remember, pip cost is exponential. This means you will need to multiply this value based off of
the number of lots you are trading. As the size of your positions increase, so will the cost
incurred from the spread.

Changes in the Spread

It is important to remember that spreads are variable meaning they will not always remain the
same and will change sporadically. These changes are based off of liquidity, which may differ
based off of market conditions and upcoming economic data. To reference current spread rates,
always reference your trading platform.

Forex Spreads and the News

Spreads are based off the Buy and Sell price of a currency pair.
Spreads are variable and can change during news.
Watch for normalization of spreads, shortly after economic events.

Financial markets have the ability to be drastically effected by economic news releases. News
events occur throughout the trading week, as denoted by the economic calendar, and may
increase market volatility as well as increase the spreads you see on your favorite currency pairs.
It is imperative that new traders become familiar with what can happen during these events. So
to better prepare you for upcoming news, we are going to review what happens to Forex spreads
during volatile markets.

Spreads and the News

News is a notorious time of market uncertainty. These releases on the economic calendar happen
sporadically and depending if expectations are met or not, can cause prices to fluctuate rapidly.
Just like retail traders, large liquidity providers do not know the outcome of news events prior to
their release! Because of this, they look to offset some of their risk by widening spreads.
Above is an example of spreads during the January NFP employment number release. Notice
how spreads on the Major Forex pairs widened. Even though this was a temporary event, until
the market normalizes traders will have to endure wider costs of trading.

Dealing with the Spread

It is important to remember that spreads are variable, meaning they will not always remain the
same and will change as liquidity providers change their pricing. Above we can see how quickly
spreads normalize after the news. In 5 minutes, the spreads on the EURUSD moved from 6.4
pips back to 1.4 pips. So where does that leave traders wanting to execute orders around the
news?
Traders should always consider the risk of trading volatile markets. One of the options for
trading news events is to immediately execute orders at market in hopes that the market volatility
covers the increased spread cost. Or, traders can wait for markets to normalize and then take
advantage of added liquidity once market activity subsides.

Beware of the Spread

-What Is the Spread?
-Spread Focal Points That FX Traders Should Regard
-How a Wider Spread Can Eat Into Your Account Equity
Price is what you pay. Value is what you get.
Warren Buffett.
What Is the Spread?
Forex trading is a very cost-effective market relative to other markets. As a trader in the FX
market, your only cost to enter a trade is the spread. The spread is measured in pips and is the
difference between the bid and ask of two currencies that are known as the base and counter
currency.

If youre actively trading, you should care very much about how many pips make up the spread
on the trade youre considering. Your concern would focus on the fact that youll be paying the
spread every time you enter into the trade and the less spread you pay, the quicker your trade will
be profitable if the market moves in the direction you anticipated. Please note that you do not pay
the spread when exiting the trade.
If youre unfamiliar with the term pips, there is no need to remain confused. Chances are, youve
heard the broadcaster on the financial news network mention that the stock market was up or
down 100 points today or that Oil was down a handful ticks. The forex equivalent of points
or ticks is pips and for a majority of currencies, the pip is found in the fourth spot past the

decimal, but you have paris such as those with the Japanese Yen where the pip is found in the
second spot past the decimal.

Spread Focal Points That FX Traders Should Regard

If you hold the trade for a longer period of time than a scalper would (multiple hours, days, or
weeks) then the spread only become of interest to you upon entry as well as times of relative
illiquidity. To think in terms of liquidity, its best to think as to when banks are less aggressive in
offering prices on the markets. Banks are often least aggressive at times of uncertainty or when
the multiple banks are scaling back on their price offerings like on major news events or on the
close of the market or open of the market.
Learn Forex: Bid / Ask Travel Nearly in Tandem At Most Times except Thin Markets like
EMFX

Presented by Tyler Yell

If you like to trade emerging market currencies, or have thought about doing so, youll notice the
spreads are above average. Not only are the spreads larger but the moves are often quicker than
most currencies on a total pip move basis. When you look at the driving force of Emerging
Markets, you should be aware of more aggressive moves which can be caused by monetary
policy divergence. This is common under such EMFX crosses like USDZAR (US DOLLAR /
South African Rand) or USDMXN (US Dollar / Mexican Peso) or a Central Bank announcement
resulting in a flow of capital out of the less developed / stable economies, which make risk:
reward all the more important. However, there are two key things that you should focus on in
terms of the spread; pip cost and spreads widening at illiquid moments in the market.
Youve recently learned how spreads can cause margin calls especially when traders become
over-leveraged and try to engage a hedge. However, if youre not careful, the EMFX crosses and
even thinner G10 crosses can eat into your account equity regardless of attempted hedge towards
thinner times of the market, like the daily close and definitely the weekly close on Friday at 5pm
ET. In crosses like USDMXN or even GBPNZD, you can easily see spreads of 30-250 pips.
Before we move on to the next section, please understand that not all spreads are created equal.
The pip cost or value will determine if a 2 pip spread is equivalent to a 20 pip spread from a cost
perspective or maybe even cheaper. On USDMXN, you can see a 100k trade brings a pip value
of $0.75, so a 20 pip spread would only be $15. Whereas a 2 pip spread on EURUSD with a $10
per pip value per 100k lot would be more expensive at a net cost of $2.
How a Wider Spread Can Eat Into Your Account Equity
The significance of a widening spread, like the one shown on both tick charts, is due to a fact
that no trader can deny. If you hit the bid, and are now long the currency pair like GBPUSD, you
should only care about the offer because the level at which you can get out of the trade will
determine your loss or profit. When in a trade, a widening spread means that a profitable exit is
less likely or the amount of profitably is diminished.
Bottom Line:
The core of this article is to help you see how a wider spread can eat into your account equity
beyond what you may first expect. If you are in an active trade, the only thing that matters is
getting out at the best price according to your analysis and a smaller net-spread can help
immensely. Therefore, as an educated and active Forex trader, beware of the spread.

Spreads Can Cause Margin Calls

At this point in our trading education, we should be aware of the fact that FX spreads are
variable and can widen to levels several times larger than their typical spreads. These spread
increases are most often seen during news releases and can affect our positions rapidly. But,
what is the best way to weather the storm during times of widening spreads?
How to Truly Protect Ourselves Against Widening Spreads

The only way to protect ourselves during times of widening spreads is to restrict the amount of
leverage used in our account (which in my opinion, should be less than 10x leverage). Spreads
can only hurt us when a trade is being opened or closed. If we arent opening or closing a trade
during a news events, we wont be affected. Prices will eventually go back to normal and at
some point we will close on our own terms.
The only time the market can force our hand to liquidate our positions is with a margin call. If
we reduce our leverage, we reduce our chances of liquidation.
The Hedging Myth
Helping traders around the world means that I have seen many different methods to trade this
market, both good and bad. One of the most damaging methods Ive come across is the idea of
hedging a Forex trade by opening an opposing trade in the same currency pair and holding both
long and short positions simultaneously. This not only incurs greater trade cost (by paying
additional spread) but does not protect your position against additional losses.
Hedgers attempt to lock-in their profit or loss on a trade by opening an opposing trade, but if the
spread widens, this negatively affects both sides of the trade. If the trader is over leveraged on
these trades, a wider spread could incur a margin call and liquidate both positions. Worst of all,
you would most likely be filled at the widened spread prices, adding insult to injury.
So now we know, hedging is not the proper way to secure a profit or a loss. Only the closing of a
position can do that. Hedging also can be dangerous around widening spreads and can cause
margin calls, so we need to limit the amount of leverage we are using to 10x or less.

What is Leverage?
Leverage is a financial tool that allows an individual to increase their market exposure to a point
that exceeds their actual investment. For example, a trader goes long 10000 units of the
USD/JPY, with $1,000 dollars of equity in their account.
The USD/JPY trade is equivalent to controlling $10,000. Because the trade is 10 times larger
than the equity in the traders account, the account is said to be leveraged 10 times or 10:1.

Had the trader bought 20,000 units of the USD/JPY, which is equivalent to $20,000, their
account would have been leveraged 20:1.

Leverage allows an individual to control larger trade sizes. Traders will use this tool as a way to
magnify their returns. Its imperative to stress, that losses are also magnified when leverage is
used. Therefore, it is important to understand that leverage needs to be controlled.

Understanding Forex Margin and Leverage

What is Margin?
Using margin in Forex trading is a new concept for many traders, and one that is often
misunderstood. Margin is a good faith deposit that a trader puts up for collateral to hold open a
position. More often than not margin gets confused as a fee to a trader. It is actually not a
transaction cost, but a portion of your account equity set aside and allocated as a margin deposit.
When trading with margin it is important to remember that the amount of margin needed to hold
open a position will ultimately be determined by trade size. As trade size increases your margin
requirement will increase as well.
What is leverage?

Leverage is a byproduct of margin and allows an individual to control larger trade sizes. Traders
will use this tool as a way to magnify their returns. Its imperative to stress, that losses are also
magnified when leverage is used. Therefore, it is important to understand that leverage needs to
be controlled.
Lets assume a trader chooses to trade one mini lot of the USD/CAD. This trade would be the
equivalent to controlling $10,000. Because the trade is 10 times larger than the equity in the
traders account, the account is said to be leveraged 10 times or 10:1. Had the trader bought
20,000 units of the USD/CAD, which is equivalent to $20,000, their account would have been
leveraged 20:1.

Effects of leverage
Using leverages can have extreme effects on your accounts if it is not used properly. Trading
larger lot sizes through leverage can ratchet up your gains, but ultimately can lead to larger
losses if a trade moves against you. Below we can see this concept in action by viewing a
hypothetical trading scenario. Lets assume both Trader A and Trader B have starting balances of
$10,000. Trader A used his account to lever his account up to a 500,000 notional position using
50 to 1 leverage. Trader B traded a more conservative 5 to 1 leverage taking a notional position
of 50,000. So what are the results on each traders balance after a 100 pip stop loss?
Trader A would have sustained a loss of $5,000, loosing near half their account balance on one
position! Trader B on the other hand fared much better. Even though Trader B took a loss off
100 pips, the dollar value was cut to a loss of $500. Through leverage management Trader B can
continue to trade and potentially take advantage of future winning moves. Typically traders have
a greater chance of long-term success when using a conservative amount of leverage. Keep this
information in mind when looking to trade your next position and keep effective leverage of 10
to 1 or less to maximize your trading.

What Is a Margin Call & How Do You Avoid

One?
-A Short Introduction to Margin & Leverage
-Causes of Margin Calls
-Margin Call Procedure
-How to Avoid Margin Calls
Never meet a margin call. You are on the wrong side of a market. Why send good money after
bad? Keep the money for another day.
-Jesse Livermore
To get a grasp on what a margin call is, you should understand the purpose and use of Margin &
Leverage. Margin & Leverage are two sides of the same coin. The purpose of either is to help
you control a contract larger than your account balance. Simply put, margin is the amount
required to hold the trade open. Leverage is the multiple of exposure to account equity.
Therefore, if you have an account with a value of $10,000 but you would like to buy a 100,000
contract for EURUSD, you would be required to put up $800 for margin in an UK account
leaving $9,200 in usable margin. Usable Margin should be seen as a safety net and you should
protect your usable margin at all costs.
Causes of a Margin Call
To understand the cause of a margin call is the first step. The second and more beneficial step is
learning understanding how to stay far away from a potential margin call. The short answer as to
understand what causes a margin call is simple, youve run out of usable margin.
Learn Forex: Usable Margin & Usable Margin % Are Key Metrics of Every Account
The second and promised more beneficial step is to understand what depletes your usable margin
and stay away from those activities. In risk of oversimplifying the causes, here are the top causes
for margin calls which you should avoid like the plague (presented in no specific order):

Holding on to a losing trade too long which depletes Usable Margin

Overleveraging your account combined with the 1st reason
An underfunded account which will force you to over trade with too little usable margin

Put together in one sentence, the common causes of margin call is the use of excessive leverage
with inadequate capital while holding on to losing trades for too long when they should have
been cut.
What Happens When A Margin Call Takes Place?
When a margin call takes place, you are liquidated or closed out of your trades. The purpose is
two-fold: you no longer have the money in your account to hold the losing positions and the
broker is now on the line for your losses which is equally bad for the broker.
How to Avoid Margin Calls
Leverage is often and fittingly referred to as a double-edged sword. The purpose of that
statement is that the larger leverage you use to hold a trade greater than some large multiple of
your account, the less usable margin you have to absorb any losses. The sword only cuts deeper
if an over-leveraged trade goes against you as the gains can quickly deplete your account and
when your usable margin % hits, zero, you will receive a margin call. This only gives further
credence to the reason of using protective stops while cutting your losses as short as possible.
Learn Forex: The Effects of Leverage Cut Both Ways, Choose Wisely

The purpose of this quick Trader A vs. Trader B snapshot is to show you the quick peril you can
find yourself in when over leveraged. In the end, we dont know what tomorrow will bring in
terms of price action even when a compelling set-up is presented.

An Introduction to Risk Management

All traders need to master Risk Management

Margin & Leverage can affect your total loss
Plan your stops using Risk / Reward ratios

A trader will learn many things in their career, but no lesson is as important to master as risk
management. Understanding and managing risk will ultimately affect how much we loose on any

specific position in the event that the market moves against an open order. In todays lesson we
will being looking at some key components to understand when it comes to managing risk.
Margin & Leverage
Margin and leverage are two important concepts every Forex trader must know. Forex is traded
on margin meaning money must be put aside to hold open your trade. As the margin requirement
is smaller than the actual trade size traders can leverage much larger position than what you may
have on deposit in your account balance. While leverage can increase your profits, It can also
compound your losses!
Normally it is recommended to use no more than 10 to 1 effective leverage as shown below. To
learn more about this equation and how to manage margin and leverage read more at the FXCM
University below.
Learn about margin and leverage HERE! www. dayfxstrategy.com

Setting Stops
For most traders, the majority of the emphasis of a trading plan is set on the market entry.
However, equal if not more emphasis should be placed on setting stop orders. This order type is
designed to execute in the event that a position moves against you. Traders should familiarize
themselves with this order and how to place them.
Typically stops are set above a key line or resistance or below a key point of support. Once they
are found they can even be coupled with your trade size to extrapolate your total risk in absolute
dollars!

Risk Reward Ratios

Risk reward ratios compare the amount a trader can potentially earn on a successful trade,
relative to the risk to do so. One easy way to find this value is to evaluate the difference between
the stop and limit on a specific trade setup. These values are important because regardless of the
strategy used, traders should look to capitalize on winning positions, while cutting their losses as
quickly as possible
Knowing this, traders should always look to maximize their profit potential through the use of a
positive risk reward ratio. This will help traders avoid The Traders Number one Mistake.

Making Leverage Easier to Understand

Leverage gives traders the ability to open positions with trade sizes larger than their account
equity. We want to be careful when using leverage as this magnifies both our trades gains and
losses, but how can leverage be controlled? How do we determine the amount of leverage we are
using at any given time? These are the questions we will cover in todays article.
Margin Can Be a Distraction
Let's say a trader logs into their trading account and finds the amount of margin required to trade
10,000 units of USD/JPY is $200...which means $200 is set aside from my accounts equity. If
we wanted to open a 100k trade, that would take $2000 to be set aside, etc.

At this exact moment, many traders begin to look at leverage the wrong way. We see the margin
required, we look at our accounts equity level and then figure out how much we can open. So a
trader with a $2,500 account might feel comfortable opening a 100K USDJPY position because
it only requires $2,000, but that would be a terrible decision. Why? Because we would be
leveraging our account 40 times!
How We Should Calculate Leverage
So where did we go wrong with our trade? We were so distracted by the margin requirement that
we forgot to look at what we were actually trading, $100,000 US Dollars against the Japanese
Yen. $100,000 is 40 times our $2,500 equity that we deposited into our trading account. Using
this amount of leverage is very dangerous and actually decreases the chance we will be profitable
traders in the long run.
To solve this problem, we need to first look at the actual trade size in relationship to how much
equity we have in our account. We need to calculate what each trades notional value is and
make sure it is not too large for our risk appetite. A good rule of thumb that I follow is never
trade more than 10 times your accounts equity across all of your open trades.
For example, our $2,500 account we would multiply $2,500 by 10 to get to $25,000. That
means we could open up a maximum of 2 mini lots in USD/JPY and be within the rule of 10.
The best part is, as long as we always keep our trades less than 10 times our equity, we dont
need to worry about how much margin each pair requires. The formula insures our account will
be well capitalized for the positions we have open.
Register for a FREE demo account and open a trade no larger than 10 times your account's
equity. This will give you an idea of how price fluctuations affect your account while using
reasonable amounts of leverage.

The Truth about Trading That Can Calm

Your Frustrations

Where To Buy Is A Small Part Of the Puzzle

Learn How To Take Small Losses Early Is Key
Focus On Good Decisions More So Than Right / Wrong

Accepting losses is the most important single investment devise to insure safety of capital
-Gerald Loeb
Its natural for you to look profitable FX traders to see what type of trading methodology you
should take on. Because, you figure, if James Stanley is making money on the Finger Trap
strategy, then thats obviously the way to go right? But if hes doing well with such a short-term
methodology, why is Jeremy Wagner knocking out big moves with Elliott Wave & Donchian

Channels? The answer to this question is that the truth about trading lies less is where to buy and
more in deciding where youre wrong and should get out of the trade.
Where to Buy Is a Small Part of the Puzzle
Of course, you should have an idea where is a good time to enter into a trade. I consider this an
edge, when your entry has a better chance or probability of profit than a random entry. The most
common of edges that youll hear us address at DailyFX is trading with the trend and when
reasonable fading the crowd bias with our Speculative Sentiment Index or SSI. More
importantly, its best to write down the key things that build your edge so that before you can
objectify your edge and not be swayed by emotions before jumping in a trade.
Learn Forex: My Checklist for Entering a Trade

Chart Created by Tyler Yell, CMT

With my objective edge checklist displayed on the AUDUSD chart above its important that you
understand that it doesnt hold the path to riches but it is important. The importance lies in that
youre not being pulled by the latest news headline or largest candle on the chart which could
just be a few large orders going through that doesnt break the overall trend. In fact, a great
investor of the 20th century, Sir John Templeton, used to keep a list of investments hed make if
a price got to a certain price and give it to an associate to enter orders so that he would not be
dismayed by the news around that time and in effect keeping his buying objective when it was
easier to be subjective.
The Bottom Line: You need to have an objective way of identifying the edge but getting into the
trade isnt nearly as important as getting out of the trade at appropriate points.
Learn How to Take Small Losses Early Is Key

If you decided to set out and learn the investing secrets of the top traders in the world, youd
likely end up more confused than when you started. The reason for the confusion is that you may
read the great Paul Tudor Jones, who stated, I believe the very best money is made at the market
turns. Everyone says you get killed trying to pick tops and bottoms and you make all your money
by playing the trend in the middle. Well for twelve years I have been missing the meat in the
middle but I have made a lot of money at tops and bottoms."That could easily get you excited
about learning how to read market turns but just as quickly, you may read Bernard Baruch
stating, Don't try to buy at the bottom and sell at the top. It can't be done except by liars. or I
made my money by selling too soon, which was in context of catching the meat of a move.
Learn Forex: Decide Where Your Trade Is Wrong before Deciding Where Youre Right

Chart Created by Tyler Yell, CMT

Youll notice in the chart above that I dont know if EURUSD will go to 1.3200, 1.2400, or
lower but I know if EURUSD breaks above 1.3900 which is the trend line resistance that I do not
belong in a short trade. Deciding and honoring your exit point is a very tough but critical point in
trading and why two traders can be very successful but have completely different ways of
entering into a trade. In other words, if one guy is doing great picking tops and bottoms and
another is doing great catching the meat of the move then the common denominator of these
professional traders is their ability to decide when they are wrong on the trade as per their
analysis for getting in in the first place.
The Bottom Line: There are many roads that lead to trading well but there is only one highway to
trading poorly and that is letting the market trade past your conviction point for getting into a
trade. Make sure you know at what price you should no longer have your capital at risk or else
youre just gambling.
Focus on Good Decisions More Than If Youre Right / Wrong

Its easy to close a profitable trade and think that you were right on your call or close out a losing
trade and say you were wrong on the trade but that can be a harmful way of thinking. The harm
comes from the fact that when you entered the trade, you may have an objective edge as we
discussed earlier but you obviously didnt know whether youre trade would close at a profit or
loss (or else, youd never enter a losing trade again). Whats a more appropriate way to look at
any trade is making sure that its based on good and methodical decisions because a decision is
based on collecting the present data and putting the best foot (buy, sell, flat) forward, which is a
fair definition of trading.
As you can imagine, in all of life, were always making decisions. When youve made a bad
decision, in trading as in most of life, youre best served in recognizing when the decision did
not turn out as you hoped and changing your course of action as soon as possible. What can be
harmful, is when you tied every decision you make to your ego so that you wait for the
circumstances to hopefully turn so that youre hopefully proven right and your ego is protected.
This hope has cost many traders their career and I hope this article prevents anyone from
repeating this mental error in 2014.
Closing Thoughts
Adjust your thinking on trading so that you see loss control and objective decision making that
protects your capital as the cornerstone of your trading while see an entry price in less esteem as
you may have earlier in your career. That is the truth of trading.

Just One of a Thousand Insignificant, Little

Trades
There is a phenomenon that almost every trader struggles with at some point in their career. For
some, it even happens before they ever get started. For me, it was most prominent in my career
when I was making the switch to FX from trading stocks and options.
And that is the ever-present, but occasionally more prominent fear of failure.
Fear can stupefy traders into in-action; allowing their trading accounts to sit idly while their
dreams dissipate into the realities of indecision. Fear can affect us individually, and it can
become a pervasive theme throughout markets, wreaking havoc across the globe; 2008 is
evidence how poisonous this emotion can become.

In this article, Im going to share with you some of the best advice that Ive ever received on the
topic of fear; a short, sweet axiom that I can utter to myself whenever I have a question about
whether or not I should take that trade that instantly dissolves any fear that I may have.
Before we get to the quote, there is an important question that every trader needs to have the
answer to at all points throughout their trading day. The answer to this question will add
perspective to our fear; it will show us how insignificant this emotion can be and even more
importantly it will encourage us to battle through difficulties to get to the promise land. And
that question is:
Why do you trade?
There isnt one right answer to this question The answer can be different for all of us.
Some of us just want to make a little extra money so that we can spend more time with our
families, while others have plans and hopes for full-on global financial domination. The answer
to this question is your driver. This is what can make the tough times easy.
Whatever the answer is, it needs to be important to you.
This is your goal. This should be posted on the top line of your trading plan as a reminder of
what you hope to get out of all your hard work. Its of vital importance to keep this in mind,
because when we are trading, there is a litany of factors to stay on top of. Our primary objective
can easily become obscured, which can lead to paralysis by analysis.
One Trade Wont Make Your Career, but It Sure Can Break it

This is how the conversation came about with my friend in which I ultimately found the error of
my ways. The friend, also a former stock trader, had moved into the FX market earlier than I
had. He had adapted his game before FX was the prominent asset class it is today. He has since
retired and now spends his days on the sunny shores of San Diego or Hawaii, wherever his
mood takes him. He still trades FX, but primarily for fun as he doesnt really need to earn
another dollar for the rest of his life.
Coming from stocks and options, I was a patient trader. I would find a stock I liked and a
reason I liked it (usually a fundamental story of some kind such as a biotech company with a
product up for FDA approval), and I would then watch the technical to find a comfortable way to
play it. The inclusion of options, essentially, gave me the opportunity to leverage my ideas.
Trading in gaps was a near necessity if I wanted to catch the bigger moves, and because of this I
comfortably developed myself as a swing-trader.
The FX Market can be intimidating
Even after trading in stocks for over nine years at the time I had moved up to FX, the speed of
the Forex market was impressive. The fact that the market never closes was only partly as
interesting to me as the amount of liquidity behind each of the major currency pairs. The
availability of 400 times leverage (which has since been lowered to a maximum of 50 times
leverage per Dodd-Frank in the United States), made these moves seem even more threatening.
Just as I had done with stocks, I was patient. I waited. I looked for an opportunity, a theme with
which I could look to begin to build a position.
And when I finally found that theme, my first entry hit its stop.
I attempted to re-enter, thinking that my analysis was strong, and I now had an opportunity to
enter at a better price. That got stopped out as well.
I worked through this uncomfortable, awkward period of trading a stock-traders strategy in a
Forex traders market, and didnt see results resembling anything close to what I had put up
trading stocks. For the first time in a long time, I was looking at a negative profit line and I began
to question whether I really wanted to adapt to the FX market, or whether I wanted to go back to
trading stocks and options.
A traders psychology is of the upmost importance, I knew that then as I know it now, and I
realized that I was starting to dig myself into the pit of despair that traders will occasionally find
themselves languishing within.
So, I talked to my friend. And he started the conversation by asking me the very same question
that I began this article with: Why do you trade?
I gave him my answer, and he then asked me
Do you honestly think you are going to achieve all of that with one trade?

To which I replied, well, no but. At which point he promptly cut me off.

He then went on a lot of people like to trade because of the feeling of being right [which was not
the reason I had provided him.] Its not all that different than the reason people will sit in front of
a slot machine throwing away their childrens inheritance one quarter at a time. They know that
the odds are against them, they just want to feel that emotion of winning. It's an easy trap for
human beings, who innately desire to be right, to fall into.
He continued: with your goal, you are going to need a heck of a lot more than one trade, arent
you?
I looked at him like the wizard that he had just become to me, and nodded in agreement.
He went on to say, while you may need a lot more than one trade to get what you want, any one
of those trades can easily drain your account, and end your game pretty quickly. So James, the
answer is simple: You need to learn to be wrong more often because any trade you take is going
to be but one of a thousand insignificant little trades in your career.
One of a thousand insignificant, little trades
That line hit me like a freight train carrying a ton of bricks. It showed me where my perspective
had become skewed when moving from trading stocks to FX; the fact that all of this additional
leverage I now had at my disposal was not necessarily something that I had to use. It merely
gave me more flexibility, which like freedom, is best in abundance so that we can choose how
or how not to impact our own fate.
More importantly that that this phrase puts into perspective the fact that any one trading idea
you have is, at its very best, a hypothesis. Nobody knows for certain what price will do next.
There is risk in every single trade that we place, and every single idea that we have.
Counter Fear with Planning
The best way to counter fear in the FX market is planning. After the conversation with my
friend, I built risk parameters into my trading plan that will not allow me to lose more than 5% in
any given day, or more than 1% on any given trade idea. This is what allows me to look at every
trade I place as insignificant in the grand scope of my overall trading career; because the most
that it can hurt me is 1/100th of my account value.
Some ideas work out, others dont. But worse-case scenario, I come back to the game tomorrow
with at least 95% of todays account equity, and a very real chance to move one step closer to my
goal.
This part of my plan has truly made each trade I place but one of thousands of insignificant, little
trades. There is a big reason that this is important advice. Because if we are ever to attain our
goals, there is but one way to do it: By placing lots, and lots of trades. Fear is the enemy in that
paradigm, and sitting on the sidelines is only wasting time. Even if its a surreal market

condition, trade it on a demo account until you have a strategy that you feel is consistent enough
to put real money to work.
Because the only thing you will never have the opportunity to gain more of in this world is
time. Time is the only asset available to you in a finite amount. You can make more money, you
can buy more stuff, and you can get more of anything else. But you cannot get more time.
Trading gives us the opportunity to make the most of this precious time. Use it wisely.

Is the Job of a Forex Trader to Know the

Future?

Get Real About What Were Trying To Do

Entries Should Be Built Upon Evidence
Preserve Mental Capital By Taking Money Off The Table

The objective is not to buy low and sell high, but to buy high and to sell higher. We can never
know what price is low. Nor can we know what price is high. Always remember that sugar
once fell from $1.25/lb. to 2 cent/lb. and seemed cheap many times along the way.
-Dennis Garmans 4th Trading Rule of 22
Many traders understandably want to know what is going to happen tomorrow. Of course, we
have no ability to know what tomorrows close will be or where the exact pivot in price will be.
This is why we key in on important price action and fundamental developments. Being on the
front edge of this type of information can help us get an idea of whether a trend will continue or
more importantly if the edge with which is entered the trade is beginning to wane and whether or
not we should scale out of the trade.
Get Real about What Were Trying to Do
Because we dont know the future, we can only rely on one thing. We can only embrace that
trading is about the odds of being in a good trade and in addition to that, increasing our odds so
that we can make money trading the Forex Market. Naturally, we like to increase our odds that
the trade will be successful by entering in the direction of a trend off a clean correction that is
losing steam with a system like Ichimoku or moving averages.
However, we know that not every trade will be a winner so we fight to protect our trading
capital. In fact, learning where to appropriately take losses which Gerald Loeb names as the most
important single investment device to insure safety of capital should be referred to as the truth of
trading. Therefore, what were really trying to do in the end is use the present information or
price action as well as developing fundamental story to build up a trading idea that would allow
us to profit in the market while not risking too much of our account on any one trade.

Entries Should Be Built Upon Evidence

To expand on that point, you should note that after first fighting to protect your trading capital
you should enter into trades that are showing incremental evidence that the trend is continuing to
build. As James P. Arthur notes in his market Truisms & Axioms, Commandment #1: Thou
Shall Not Trade against the Trend. Knowing that we should not trade against the trend, we can
look for a solid fundamental backdrop that aligns with a technical opportunity to enter in the
direction of the trend at a favorable level while picking a point to protect your capital.
Learn Forex: In a Clear Uptrend like USDJPY, Its best to be Neutral or a Buyer

Presented by Tyler Yell

The purpose of the argument to be long or neutral is that there is a driving force behind the trend.
Most often, the driving force is a developing fundamental imbalance which favors the currency
being bought over the one being sold. Therefore, trading against the trend is a hard and risky way
to make money long-term which is our key goal. Once the evidence is clean and worth risking
your capital in order to grow it, you can look to enter into the trend with decent profit targets that
will likely lead to leaving money on the table.
Preserve mental Capital by Taking Money off the Table
This short article is to encourage you as a trader by improving your odds even when the future is
not known. You were just introduced to the argument that because you do not know the future,
you should look to enter into the direction of the trend when credible evidence presents itself at a
favorable price of the market. The last key thing you should be comfortable with as a trader who
doesnt know the future is having an ability to either leave money on the table or miss a trade
that doesnt feel right to you.

Learn Forex: USDCAD Daily Exhaustion Candle Warrants an Exit but Not a Short Position

Presented by Tyler Yell

One of the most famous investors of the 21st century, Bernard Baruch made the famous and
appropriate comment, I made my money by selling too soon. This quote backs up another
saying in trading that the one who leaves the most money on the table, leaves with the most
money. Its tempting to hold onto a trade that is trending but when your target is hit, you should
get out without hesitation because what you wanted out of the trade was done.
Closing Thoughts
Neither you, nor the next trader, nor the biggest bank trading desks on Wall Street know the
future. Therefore is important that you stay away from chasing highs or lows because we dont
know what will be a high and what will be a low. Also, you should look to enter a trade in the
direction of the trend when the proper amount of evidence according your trading system is
present and be ready to exit the trade when your target is hit as opposed to being around for the
big reversal when crowd psychology takes over and every one leaves the trade you were riding.

Arriving at a Risk/Reward Ratio

In our live Trading Room Webinars on the principles of Money Management, we often receive
questions on one of its key tenetsa 1:2 Risk Reward Ratio.

Keep in mind that a Risk Reward Ratio is nothing more than where a trader places their stop and
limit relative to their entry. For a 1:2 RRR, whatever amount the trader is risking based on their
stop placement, double that amount and set that as your limit.
Take a look at the 4 hour chart of the EURCAD below...

Let's say that we entered the trade based on a break above resistance at 1.3925. A prudent stop
could be placed at the point on the chart labeled Stop...roughly at 1.3810...115 pips below our
entry. So the trader would double the 115 and we have 230. So we would add 230 pips above our
entry price and we would have 1.4155. Which is roughly the area where we have our limit
labeled on this chart.
For a 1:2 RRR, it all boils down to seeking to gain twice the amount we are risking on a trade.

Risk Reward Ratio Validation

In our Money Management webinars we mention that a significant aspect of the rules is to
always trade with at least a 1:2 Risk Reward Ratio (RRR) in place. A key aspect of this is how is
a trader to know that the currency pair at least has the potential to move far enough to make the
RRR valid.
Lets take a look at the Daily chart of the EURNZD below

Trade Rationale:
At the time of this chart we can see that the bias on the pair is bearish as the pair is trading below
the 200 SMA and the Strong/Weak analysis showed that the EUR was weak and the NZD was
stronger. As such, we would look for technical opportunities to short the pair.
Price action has been stalling just above support around 1.7080the green line labeled Enter.
Should price action take out that support level, 1.7080 or, better yet, CLOSE below that level, a
trader could short the pair with a stop just above some of the recent consolidationthe red line
labeled Stop.
Since our stop would be around 1.7295 and our entry was at 1.7080, the risk we are taking on the
trade is 215 pipsthe distance between our entry and our stop. Now lets bring our 1:2 RRR into
play. Since we are risking 215 pips we need to have a realistic potential of gaining 430 pips on
the tradetwice the amount we are risking.
As we look at the chart again, since there is virtually no support between our entry and our limit,
we see that we have a potential gain of 590 pipsthe distance between our entry and the next
level of support on the Daily chart. As such this trade more than meets the 1:2 Risk Reward
Ratio requirement.
In fact, the RRR on this trade is 1:2.7.
(However, keep in mind that even though the pair legitimately has the room to move around 590
pips, does not mean that it actually WILL move 590 pips. Nothing in trading is guaranteed.)

How Effective Leverage Affects Forex

Profitability
Many Forex strategies focus on entry and exit signals of a trade. This article illustrates how
traders can take the same signals, yet arrive at different profit amounts. Therefore, determining
an appropriate amount of effective leverage is crucial to a comprehensive Forex trading plan.
Many traders focus all of their energy on finding the right entry and exit signal but still end up
losing in the end. Today, I want to illustrate how two traders (Bob and Ed) place the same
trading signals in their Forex account, yet end up with different equity amounts.
To keep the illustration simple, lets look at a two trade series. Each trade has a 100 pip stop loss
and a 150 pip profit target. The traders will lose on the first trade and win on the second trade.
When you see the results on a score card, it would look something similar to this:

Trade results in pips

At the surface level, it looks like this trader is doing well. They are maintaining a positive risk to
reward ratio, they have a good win ratio, and the number of pips collected on this series of two
trades are positive 50 pips.
Now look at what happens to the accounts equity when Bob aggressively over leverages his
account while Ed uses more conservative amounts of leverage.
Trader Bob
Starting Capital - $10,000
Account is set to 50:1 leverage. He thinks he is conservative and implements 40 times effective
leverage.

Trade # Trade Size Value per Pip

Trade 1 400,000
40
Trade 2 240,000
24
Hypothetical results for illustrative purposes only.

Trade
Result
-100
150

Profit/Loss
-4000
3600

Acct
Equity
6,000
9,600

Notice how Bobs two trade sequence netted him +50 pips yet he lost $400 in his account.
Obviously, the second trade had a much smaller trade size than the first, but when you overleverage your Forex account, any losing trade damages your capital base to the point where you
need to change your trade size or deposit more funds.
Trader Ed
Starting Capital - $10,000
Account is set to 50:1 leverage. Ed has gone through our DailyFX EDU training materials and
wanted to trade conservatively. He determined the appropriate amount of effective leverage for
him was 5 times.

Trade # Trade Size Value per Pip

Trade 1 50,000
5
Trade 2 47,000
4.7

Trade
Result
-100
150

Profit/Loss
-500
705

Acct
Equity
9,500
10,205

Hypothetical results for illustrative purposes only.

Ed placed the same trades as Bob and had the same starting account balance as Bob, but Ed
implemented a more conservative amount of leverage. His trade sizes were 1/8 the size of Bobs
yet:

Ed ended up with higher equity relative to Bob

Eds net profit/loss (P/L) was positive while Bobs P/L was negative

Two points to take away from this illustration.

1. When faced with a losing trade, high degrees of leverage destroy your capital base
forcing you to change your future trade sizes or deposit more funds.
2. When using conservative amounts of leverage, your equity P/L tracks your net pips P/L
Though we place trades in hopes of it working out in our favor, we must also be prepared if it
doesnt. Part of that preparedness is a result of determining an appropriate amount of effective
leverage. At DailyFX, we talk about using less than 10 times effective leverage. That way, when
you are wrong on a trade, you still have the majority of your account capital remaining.

FOREX: How to Determine Appropriate

Effective Leverage
A common question traders ask in our courses is how much leverage should I use? In our trading
courses, we frequently talk about using less than 10 times effective leverage.

To get started, lets look at what leverage is and why it is important to generally use less leverage
rather than more leverage. Later on, we will explain the simple calculations needed to determine
the effective leverage on your trading account.
What is leverage?
Leverage refers to using a small amount of one thing to control a larger amount of something
else. As individuals, we use leverage to some degree in a portion of our daily lives.

For example, when you buy a house on credit, you are actually leveraging your personal balance
sheet. Lets say you wish to buy a $200,000 house but you dont have that much cash on hand.
So you put a 20% down payment of $40,000 on the house and make regular payments to the
bank. In this case, you are using a small amount of cash ($40,000) to control a larger asset
($200,000 house).
In the stock market, many margin accounts allow you to lever up your purchases by a factor of 2.
So if you have a $50,000 deposit into a margin account, you are allowed to control $100,000 of
assets.
How is Effective leverage calculated?
To determine the amount of effective leverage used, simply divide the larger asset by the smaller
instrument. So in our housing example, we divide the value of the house by the equity in the
house which means the house was levered 5 times.
($200,000 / $40,000 = 5 times)
In the stock market example, our leverage is 2 times. ($100,000 / $50,000 = 2 times)
There is simple formula to determine your accounts effective leverage. This formula is printed
below:
Total Position Size / Account Equity = Effective Leverage
EXAMPLE:

Now, lets take a hypothetical trader and calculate their effective leverage in their forex account.
Lets assume that a trader with $10,000 equity has 3 positions open noted below:

20,000 short the EURUSD

40,000 long the USDCAD
10,000 long AUDJPY

The traders total position size is 70,000. (20k + 40k + 10k)

Using the formula noted above, the traders effective leverage is 7 times.
(70,000 position size / $10,000 Account Equity = 7 times)
How do I know how much leverage to use?
There is a relationship between leverage and its impact on your Forex trading account. The
greater the amount of effective leverage used, the greater the swings (up and down) in your
account equity. The smaller the amount of leverage used, the smaller the swings (up or down) in
your account equity. In our trading courses, we frequently talk about using less than 10 times
effective leverage.
Just because you have access to a higher amount of leverage in your account does not necessarily
mean you want to use all or any portion of it. Think of it like an automobile or motorcycle. Just
because the machine could run at speeds of 200 miles per hour, that does not mean YOU
necessarily need to drive it that fast. You see, the faster you drive it, the more likely you are to
get into an accident. Therefore, you are in greater risk of bodily injury driving at higher speeds
and leverage is similar to that analogy. More leverage puts your trading account at risk.
Why do we encourage lower leverage?
When you use excessive leverage, a few losing trades can quickly offset many winning trades.
To clearly see how this can happen, consider the following example.
Scenario: Trader A buys 50 lots of AUD/USD while Trader B buys 5 lots of AUD/USD.
Questions: What happens to Trader A and Trader B account equity when the AUD/USD price
falls 100 pips against them?
Answer: Trader A loses 50.0% and Trader B loses 5.0% of their account equity.
Example
TRADER A
TRADER B
Account Equity
$10,000
$10,000
Notional Trade Size $500,000 (Buys 50, 10K lots) $50,000 (Buys 5, 10K lots)
Leverage Used
50:1 (50 times)
5:1 (5 times)

100 Pip Loss in Dollars

% Loss of Equity
% of Equity Remaining

-$5,000
50.0%
50.0%

-$500
5.0%
95.0%

By using lower leverage, Trader B drastically reduces the dollar drawdown of a 100 pip loss.
For these reasons, that is why in my trading I choose to be even more conservative and
oftentimes use less than 10 times leverage. The appropriate amount of leverage for you will be
based on your risk appetite. An aggressive trader may utilize effective leverage amounts closer to
10 to 1. More conservative traders my utilize 3 to 1 or less.

Understanding Forex Trade Sizes Using

Notional Value
Each Forex trade is placed by selecting the number of lots you would like to control. What many
beginner (and some intermediate) traders dont understand, is that the size of your position
depends as much on the currency pair being traded as it does the amount of lots selected.
There is a common misconception out there with new Forex traders; that trade size is only
dependent on the amount of lots that the trader selects. These misinformed traders believe that
whether they are trading 10k GBP/USD, 10k EUR/JPY, or 10k AUD/CHF that they are trading
the exact same size on each position. This is simply not true. To understand the true size of your
positions, you have to consider the notional value of the position created.
Consider the following examples to understand how this works:
Lets say we were bullish the NZD/USD and decided to buy 10k @ 0.7850. How much actual
currency did we purchase? What does trading 10k actually mean? We need to look closer at the
actual transaction to see how the trade breaks down.
Learn Forex: Trade Size Depends on Currency Pair

The graphic above shows that when we Buy 10k NZD/USD, we are buying 10,000 New Zealand
Dollars and selling an equivalent amount of US Dollars. By looking at the quote, we know we
had to sell 7,850 USD to purchase the 10,000 NZD. This means the notional trade size is $7,850
worth of currency.
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Now lets take a look at a different pair. Lets say we were bullish the GBP/USD and bought a
10k lot at 1.5100. How much actual currency did we purchase now? You can see how the trade is
much bigger than the previous 10k NZD/USD trade.
Learn Forex: Trade Size Depends on Currency Pair

When we Buy 10k GBP/USD, we are buying 10,000 and selling an equivalent amount of US
Dollars. By looking at the quote, we know we had to sell $15,100 to purchase the 10,000. This
means the notional trade size is $15,100 worth of currency. This is far different than the 10k
NZD/USD.
Why Does This Matter?
This is an important lesson to understand because it can make a big difference in how you
manage your overall account. For example, if you wanted to spread your money out evenly
across multiple positions on multiple pairs, you would not want to simply trade the same lot size,
you would want to take into account the notional trade size you are taking on.
Learn Forex: Same Lot Size Versus Same Notional Trade Size

So instead of placing 100k trades on GBP/USD, EUR/USD, and USD/JPY to spread your money
evenly, you might consider 66k GBPUSD, 77k EURUSD and 100k USDJPY to spread your
trades based on the notional trade size ($99.6k worth of GBP, $100.1k worth of EUR, and $100k
worth of JPY at the time this article was written).
(As a side note, this is also why margin requirements vary from pair to pair. Youll find that the
margin requirements are higher for pairs that have a higher notional value.)
Learn Forex: Notional Value Affects Margin Requirements

What Now?
Now that you understand the notional value of your trades, you can select smarter trade sizes.
Maybe your GBP positions are too large. Maybe your NZD positions are too small. Either way,
you should now have a greater understanding in how currency pairs partially determine the size
of your positions and not simply the number of lots.

Focusing on Protective Stops over Profits

Could Help Your FX Trading

Why Many Traders Only Pay Lip-Service to Stops

What Pros Focus On - Good Enough is Good Enough
The Trick To Money Management

Participating in the markets without a plan is like ordering from a menu that has no prices, then
letting the waiter fill out and sign your charge card receipt. Its like playing roulette without
knowing in advance how much you had bet, and only after the wheel stopped, letting the
croupier tell you how much you had lost or won.
Have you ever lost a lot of money on one trade or maybe a series of very bad trades? Whats
worse when you look back on those trades is that as the loss deepened, the analysis often lost

scope which is what youve likely focused so much of your trading system development upon. If
youre analysis only matters when you enter a trade but not on your exit, then its likely best to
step away from your analysis and focus on your exits.
The opening quote reminds me of something I saw in New York a few years back. While eating
breakfast at Normas, I saw a $1,000 Frittata which prompted the internal question, what if
someone ordered this without knowing that this was a $1,000 breakfast? As a trader, I couldnt
help but think that many traders fall into that same trap of approaching a trade without having a
clue as to how expensive it may be to their p/l and career.

The key focus of this article is that without stops, youre potentially stepping into a financial and
emotional trap that youre likely unable to handle. When the market moves deeply against your
trade and you see your losses stacking up, its often easier to hope things turn around as your
account equity drops. The rest of this article will unpack that statement for you and help you see
why stops are more critical than any other part of trading and play perfectly in hand to the truth
of trading.
Why Many Traders Only Pay Lip-Service to Stops
Many traders could possibly have a larger total profit if they were paid for every time they heard,
cut your losses short, and let your profits run instead of just banking the profitable trades
theyve closed. In the heat of the moment, this statement is about as effective for traders as eat
less and workout more, is for dieters. It makes sense but as emotional beings we need more to
hang onto for the wisdom to stick.
Unfortunately, many traders often think they have accepted the risk on the trade when they place
a stop, but as soon as they move the stop against their trade, allowing them to lose more, theyve
revealed that theyre dictated by emotions more than a plan. A trading plan with a stop would
keep you from staying in a trade that is draining your account equity and should be a focal point
of your trading.
When asked what mistake many novice traders make all too often, Hedge Funder, Bruce Kovner
said that, they trade three to five times too big. They are taking 5 to 10 percent risks on a trade

when they should be taking 1 to 2 percent risks My experience with novice traders is that the
emotional burden of trading is substantial; on any given day, I could lose millions of dollars. If
you personalize these losses, you cant trade. (Emphasis mine). This quote has many nuggets of
wisdom but the takeaway should be that if you cant walk away or cut a bad trade with a stop,
youll personalize losses and will continue to suffer in your trading. Therefore, when you
personalize your losses, youre likely only paying lip service to stops.
What Pros Focus On When Choosing Entries & Exits
There are many effective ways to place stops but just like you shouldnt worry about where the
perfect entry is, you also shouldnt worry about the perfect stop placement. A common joke in
the world of trading is that the perfect stop is one pip away from the corrective high or low
against your trade. Of course, if that happens, youre more likely luckier than good but,
nonetheless you should understand what a stop is for and what traders with a good track record
focus on.
Learn Forex: A Stop Should Protect Your Capital & Trigger When Price Nullifies Your Trade
Idea

Presented by T. Yell
Professional traders will likely focus on the technical points where there trade idea is nullified.
This means that if youre trading based on a 20-day moving average or something a little more
complex like Ichimoku, you should exit when the indicator that issues a buy trade now issues a
sell trade. Beyond the technical trigger to exit your trade, you should make sure that your trade
size is calculated in such a way that when your stop is triggered, youve only lost a forgettable
amount of your account balance so that you can easily move on to the next trade.
Without a doubt, pros look for an edge when placing a trade but theyre not overly concerned
with the perfect entry like many traders who are new to the market do. Instead, many fund

managers or large banks will look for a decent edge when the fundamentals and charts combine
and then they follow up that trade with a firm protective stop so that they can let the market tell
them theyre wrong as opposed to deciding for themselves when theyre wrong.
The Trick to Money Management
The trick to money management is doing it. The sad truth of trading is that traders will pay
$1,000s for a new trading system guaranteed to pin-point entries but will not pay $15 for a book
on placing stops and how to define when theyre stop is no longer correct as per their analysis so
that they should be out of the trade and wait for the picture to be clear. One trader did a great
service to me in my earlier years by telling me that every trading desk on Wall Street has a risk
management department but none has a Profit Forecasting Department. In other words, if you
take care of the losses, the profits will take care of themselves and that is why stops are so
important.

Finding the Right Trade Size for You

Trade size is an important aspect of every trading plan. Traders quickly forget this to their own
peril. Many traders are not reaching their trading goals because their trade size was too large for
their account equity which leads to reluctance of letting go of losing trades.
This article will present an easy way to determine what trade size is appropriate for your account.

When trade size gets out of hand and too large, all the analysis in the world is worthless. The risk
can quickly outweigh the benefits. Because of this, having a formula to manage your risk is of
extreme value for your trading career. If youre not a math major, no worries at all. A simple
formula is provided at the end of the article for you apply moving forward.
Here is a visualization of the risk you take based on your trade size from Mark Douglas Trading
in the Zone. To borrow his analogy on trade size, imagine there is a large valley much like the
Grand Canyon that you are about to cross. The width of the bridge you will cross is directly
related to the number of lots you will trade. As you can imagine, if youre about to cross the

Grand Canyon on a 10 lane highway bridge, youre not going to fear walking across. You know
the potential of pain is small because the bridge below you is steady. Now, the larger trade size
you open in relation to your account, the smaller the road below you shrinks. Using the utmost
leverage available, youre essentially walking a tight rope. As you can imagine, the smallest
fluctuation in the market can throw you over board.

Now, lets walk through the application in finding the right trade size for you.
*Examples below will be filtered through the eyes of a $10,000 account with 2% max trade risk
rule to determine trade size.
Here are the two aspects youll need to answer before determining appropriate trade size:

Percent risk youre willing to accept per trade We recommend less than 2%
Where do you want your stop in terms of pips

Percent risk youre willing to accept

This will have nothing to do with the market and everything to do with your account balance.
You determine your risk, not the market. Your money management system will tell you where to
get out of every trade. We recommend you limit your risk per trade to less than 2% of your
account equity. Noting this before you enter a trade is being proactive and will prevent you from
increasing your exposure based on how good a set up looks to you. All good traders look to limit
risk and most poor traders neglect this.
Many good traders will keep a trade journal that will have their current account equity updated
and how much they should risk on any one trade. Our $10,000 account example with the 2%
max trade risk tells us that before we look at the charts, we are only willing to lose $200 on a
single trade. For most traders, this relieves stress by itself.
Converting that risk into Trade Size

Now that we know how much is at risk, we next decide the best trade size for us based on our pip
based exit. Here is a simple formula to use to determine your trade size:
Proper Trade Size Formula:
Your three inputs will be your account balance, what percentage you want to risk, and the
number of pips you are willing to allow the market to go against you before you exit the trade.
Account balanceX% risked / stop loss distance in pips = maximum value per pip
Using our example above and plugging into the formula, here are the three inputs.
Account balance = $10,000
Percent Risk = 2%
Stop loss distance = 100 pips
Plugging them into the formula:
$10,000 X 2% / 100 pips = $2 per pip
If you want a larger trade size, we recommend you find another trade that better suits your
account size or add more funds to your account.
Why do we advise limiting your trade size?
recently went through 12 million live trades to find the common traits of our successful clients.
Leverage was a main focus because many traders know what amount of leverage is available but
few knew what was amount was best. Many new and inexperienced traders over expose
themselves and when the market went against them, a large percentage of their account
dissipated. Successful traders in our study consistently stayed under 10 X effective leverage and
were often closer to 5 times effective leverage.
Here is a graph from the study to show you profitability percentage and its correlation to lower
effective leverage.

(Graph courtesy of DailyFX, Traits of Successful Trader: How Much Capital Should I Trade
Forex With?)
We encourage you to always define risk specific to your account and limit your leverage to assist
in the longevity and success of your trading business.

Order Types for Forex

There are 3 basic classifications of order types for Forex

Market orders execute at the current price
Entry orders are set away from the market to execute at a later time

A trader has many tools at their disposal in order to trade the strategy of their choosing. These
tools come in the way of different orders that allow the trader to enter and exit the market at their
convenience. Today we will look at three of the prevailing order types used by Forex traders.
Market Orders
The market order is probably the most basic and often the first order type traders come across.
Just as the name implies, market orders are traded at market! This means if you want to get into
the market immediately, you can trade a market order and be entered at the prevailing price.
Typically scalpers and day traders rely on market orders to enter and exit the market quickly, in
accordance to their strategy.
Entry Orders

The next order type is the entry order. These orders are unique in that they can be set away from
present market prices. If price trades at the price selected, the entry will enter the market and
open a new position. There are many benefits to trading with entries, including not having to be
in front of your computer to execute your orders!
Normally entry orders can be used for breakouts or with other strategies that demand execution
when price passes a certain point. To learn more on trading entry orders click the link below.
Stops & Limits
Stops and limits are orders that everyone should familiarize themselves with. While stops and
limits are technically entry orders, they deserve special attention due to their importance. In
Forex a stop is an order used to manage risk being placed away from the positions entry point.
Likewise Limits are placed away from entries but are used as an order to take profit.

3 Benefits of Using Entry Orders

Entry orders free up your day by saving you time.

Entry orders can give you better entry levels for your trades, saving you money.
Entry orders require a pre-set trading plan which keeps you accountable to your strategy.

Traders can strategize all they want to come up with a great trading plan, but if they cant
execute that plan effectively, all their hard work might as well be thrown out the window. The
Forex market is open 24 hours a day, so this means no trader can keep an eye on it all the time.
So we need a way to execute our trading plan that fits with our personal schedule.
This is where setting up entry orders comes into play. Entry orders allow us to set the price that
we would like to buy or sell ahead of time and will only get us into the trade if that price is hit.
There are several benefits to trading using Entry orders, and that is what we will discuss in this
article.
Benefit #1 Entry Orders Save You Time
The first benefit should be pretty obvious. Entry orders save us time. We do not need to be at our
computer when a trend line is hit or when price breaks out of its price channel. We can very
easily add an entry order to get us in the trade if price behaves in the way we think it will. The
order does the waiting for us and allows us to get back to spending time with our family or
spending time at work.
We can also take things one step further by setting contingent stop and limit orders to manage
our trade if our entry order is triggered while we are away. This gives us peace of mind that we
arent floating a naked trade without managing orders attached to it. To do this, click the
advanced button while placing an entry order. The option for setting a stop and a limit will be
added.

Stops and limits set in this manner are not active until the entry order is triggered and opens a
trade on our account. So we do not need to worry about a stop or limit being triggered before our
entry order is hit.
Benefit #2 Entry Orders Save You Money
The next benefit that Entry orders gives us is that they can save us money. This is a topic I teach
in many of my trading strategy webinars. To understand this better, we need to think about how
much time throughout the day we have to dedicate to Forex trading.
12 hours? 6 hours? 1 hour? 10 minutes? Most of us probably fall near the lower end of the
spectrum between 10 minutes to an hour (if we were looking at the average amount of time per
day). This is because most of us have a day job, a family, or prior obligations we must attend to.
We must now compare that amount of time to the 24 hour day that the forex market is open. If
you said you spend 10 minutes a day placing your trades, you are watching the market 0.7% of
the day. If you said you spend an hour a day placing trades, you are watching the market about
4% of the day. Knowing this, what are the odds that you are going to be looking at the market at
a time that is optimal to physically place a trade? The odds are probably not very good. It is
much more likely that the optimal time to enter a trade will fall sometime during the other 96%
of the time when you are not at your computer. If we force ourselves to trade during this small
viewing window, we are most likely getting suboptimal entries. Suboptimal entries means we are
leaving money on the table.
I see so many traders do this. We get on the computer and start looking for setups with a goal of
placing a couple trades before we need to sign off. When in reality, we should be eyeing
potential setups that we can get with an entry order. We should try to receive the most ideal price
possible even though it might not be available while we are physically sitting in our computer
chair.
Benefit #3 Entry Orders Keep You Accountable
Every strategy we use should have hard set rules before we begin trading it. This means we know
exactly what we are going to do in any type of situation before that situation arises. But at times,
our emotions (greed, fear, over-confidence, etc.) can lead us away from our trading plan and
result in us taking stabs at the market hoping to get lucky rather than taking a calculated risk
where we believe to have an edge. Entry orders (with stops and limits attached) mostly
eliminates this as a possibility and lets our strategy stand on its own without emotional
interference.
Entry orders are a great way to keep us accountable to our strategy and make sure we are
following the rules to the letter.

How to Set Stops

Many traders know that they need to place stops, and if they dont know they will likely learn
very quickly. Market movements can be unpredictable and the stop is one of the few mannerisms
that traders have to prevent one single trade from ruining their careers.
When traders begin to learn to trade, one of the primary goals is often to find the best possible
trading system for entering positions. After all, if the trading system is good enough, all the other
factors like risk management, or trade management well, they can take care of themselves,
right?
After all, if our trades are moving in our direction and we are making money, all of these other
factors might seem unimportant: All we have to do is find that system that works at least the
majority of the time, and then most traders figure they can figure everything else out as they go
along.
Unfortunately, the truth is that all of the above assumptions are hogwash. There is no system that
will always win a majority of the time, and without trade, risk, and money management most
new traders will be unable to reach their goals until they make some radical changes to their
approach.
This is a wall that many traders will hit, and a realization that will become part of most of their
realities. Because likely, none of us will ever walk on water, or have a crystal ball so that we can
display super-human capabilities of predicting trend directions in the Forex market.
Instead, we have to practice risk management; so that when we are wrong, losses can be
mitigated. And when we are right, profits can be maximized. Once again, most traders that will
find success in this business are going to come to this realization before they can adequately
address their goals.
Realizing that risk management must be practiced is one thing, but doing it is an entire different
matter. Thats what this article is about, investigating the importance of using stops and then
further, some various ways of doing so.
Why are stops so important?
Stops are critical for a multitude of reasons but it can really be boiled down to one simplistic
cause: You will never be able to tell the future. Regardless of how strong the setup might be, or
how much information might be pointing in the same direction future prices are unknown to
the market, and each trade is a risk.
In the Forex System and Strategy Course research, this was a key finding and we saw that
traders actually do win in many currency pairs the majority of the time. The chart below will
show some of the more common pairings:
Traders saw greater than 50% winning percentages in many of the most common currency pairs

Taken from The Number One Mistake that Forex Traders Make by David Rodriguez
So traders were successfully winning more than half the time in most of the common pairings,
but their money management was often SO BAD that they were still losing money on balance. In
many cases, taking 2 times the loss on their losing positions than the amount they gain on
winning positions. This type of money management can be damaging to traders: necessitating
winning percentages of 70% or greater merely to have a chance at breaking even. The chart
below will highlight the average loss (in red) and the average gain (in blue).
Traders lost much more when they were wrong (in red) than they made when they were right
(blue)

Taken In the article Why do Many Traders Lose Money, David Rodriguez explains that traders
can look to address this problem simply by looking for a profit target AT LEAST as far away as
the stop-loss. So if a trader opens a position with a 50 pip stop, look for as a minimum a 50
pip profit target. This way, if a trader wins more than half the time, they stand a good chance at
being profitable. If the trader is able to win 51% of their trades, they could potentially begin to
generate a net profit a strong step towards most traders goals.
But now that we know that stops are critical, how can traders go about setting them?
Setting Static Stops
Traders can set stops at a static price with the anticipation of allocating the stop-loss, and not
moving or changing the stop until the trade either hits the stop or limit price. The ease of this
stop mechanism is its simplicity, and the ability for traders to ensure that they are looking for a
minimum 1-to-1 risk-to-reward ratio.
For example, lets consider a swing-trader in California that is initiating positions during the
Asian session; with the anticipation that volatility during the European or US sessions would be
affecting their trades the most.

This trader wants to give their trades enough room to work, without giving up too much equity in
the event that they are wrong, so they set a static stop of 50 pips on every position that they
trigger. They want to set a profit target at least as large as the stop distance, so every limit order
is set for a minimum of 50 pips. If the trader wanted to set a 1-to-2 risk-to-reward ratio on every
entry, they can simply set a static stop at 50 pips, and a static limit at 100 pips for every trade
that they initiate.
Static Stops based on Indicators
Some traders take static stops a step further, and they base the static stop distance on an indicator
such as Average True Range. The primary benefit behind this is that traders are using actual
market information to assist in setting that stop.
So, if a trader is setting a static 50 pip stop with a static 100 pip limit as in the previous example
what does that 50 pip stop mean in a volatile market, and what does that 50 pip stop mean in a
quiet market?
If the market is quiet, 50 pips can be a large move and if the market is volatile, those same 50
pips can be looked at as a small move. Using an indicator like average true range, or pivot points,
or price swings can allow traders to use recent market information in an effort to more accurately
analyze their risk management options.
Average True Range can assist traders in setting stop using recent market information

Created by James Stanley

We walked through such a mechanism in the article, Managing Risk with ATR (Average True
Range).
Trailing Stops
Using static stops can bring a vast improvement to new traders approaches, but other traders
have taken the concept of stops a step further in an effort to further focus on maximizing their
money management.
Trailing stops are stops that will be adjusted as the trade moves in the traders favor, in an
attempt to further mitigate the downside risk of being incorrect in a trade.
Lets say, for instance, that a trader took a long position on EURUSD at 1.3100, with a 50 pip
stop at 1.3050 and a 100 pip limit at 1.3200. If the trade moves up to 1.31500, the trader may
look at adjusting their stop up to 1.3100 from the initial stop value of 1.3050.
This does a few things for the trader: It moves the stop to their entry price, also known as breakeven so that if EURUSD reverses and moves against the trader, at least they wont be faced with

a loss as the stop is set to their initial entry price. This break-even stop allows them to remove
their initial risk in the trade, and now they can look to place that risk in another trade
opportunity, or simply keep that risk amount off the table and enjoy a protected position in their
long EURUSD trade.
Break-even stops can assist traders in removing their initial risk from the trade

Created by James Stanley

But what if EURUSD moves up to 1.3190 and our trader decides to get greedy? Well, in this
case, they can remove the limit altogether and instead look to trail their stop as the trade moves
higher. After price moves to 1.3200, the trader can look to adjust their stop higher to 1.3150, a
full 50 pips beyond their initial entry so now, if price reverses, they are taken out of the trade for
a 50 pip gain.
But if EURUSD moves higher, to 1.3300 they can enjoy a larger upside than they initially had
with their limit at 1.3200.
Traders can look to manage positions by trailing stops to further lock in gains

Created by James Stanley

This is maximizing a winning position, while the trader is doing their best to mitigate the
downside.
Dynamic Trailing Stops
There are multiple ways of trailing stops, and the most simplistic is the dynamic trailing stop.
With the dynamic trailing stop, the stop will be adjusted for every .1 pip the trade moves in the
traders favor.
So, at the outset of the trade in the above example, if EURUSD moves up to 1.3101 from the
initial entry of 1.3100, the stop will be adjusted up to 1.3051 (increased 1 pip for the 1 pip move
the trade made in the traders favor).
Dynamic Trailing Stops adjust for every .1 pip that the trade moves in the traders favor

Created by James Stanley

Fixed Trailing Stops
Traders can also set trailing stops through Trading Station so that the stop will adjust
incrementally. For example, traders can set stops to adjust for every 10 pip movement in their
favor. Using our previous example of a trader buying EURUSD at 1.3100 with an initial stop at
1.3050 after EURUSD moves up to 1.3110, the stop adjusts up 10 pips to 1.3060. After another
10 pip movement higher on EURUSD to 1.3120, the stop will once again adjust another 10 pips
to 1.3070.
Fixed Trailing stops adjust in increments set by the trader

Created by James Stanley

If the trade reverses from that point, the trader is stopped out at 1.3070 as opposed to the initial
stop of 1.3050; a savings of 20 pips had the stop not adjusted.
Manually Trailing Stops
For traders that want the upmost of control, stops can be moved manually by the trader as the
position moves in their favor. This is a personal favorite of mine, as price action is a heavy
allocation of my approach, and many of my strategies focus on trends or fast moving markets.
In the article, Trading Trends by Trailing Stops with Price Swings, we walk through this type of
trade management. When using price action, traders can focus on the swings made by prices as
trends move higher or lower. During up-trends, as prices are making higher-highs, and higherlows traders can move their stops higher for long positions as these higher-lows are printed.
Once a higher-low is broken, the trader will exit the trade under the presumption that the trend
that they were trading may be over.
Trader adjusting stops to lower swing-highs in a strong down-trend

What is Slippage? Is it Always a Bad Thing?

What is Slippage?
Slippage is when an order is filled at a price that is different than the requested price.
Most conversations I hear regarding slippage tend to speak about it in a negative light, when in
reality, this normal market occurrence can be a good thing for traders. As the video above
mentions, when orders are sent out to be filled by a liquidity provider or bank, they are filled at
the best available price whether the fill price is above or below the price requested.
To put this concept into a numerical example, lets say we attempt to buy the EURUSD at the
current market rate of 1.3650. When the order is filled, there are 3 potential outcomes.
Outcome #1 (No Slippage)
The order is submitted and the best available buy price being offered is 1.3650 (exactly what we
requested), the order is then filled at 1.3650.
Outcome #2 (Positive Slippage)
The order is submitted and the best available buy price being offered suddenly changes to 1.3640
(10 pips below our requested price) while our order is executing, the order is then filled at this
better price of 1.3640.

Outcome #3 (Negative Slippage)

The order is submitted and the best available buy price being offered suddenly changes to 1.3660
(10 pips above our requested price)while our order is executing, the order is then filled at this
price of 1.3660.
Anytime we are filled at a different price, it is called slippage.
What Causes Slippage?
So how does this happen? Why cant our orders be filled at our requested price? It all goes back
to the basics of what a true market consists of, buyers and sellers. For every buyer with a specific
price and trade size, there must be an equal amount of sellers at the same price and trade size. If
there is ever an imbalance of buyers or sellers, this is what causes prices to move up or down.
So as traders, if we go in and attempt to buy 100k EURUSD at 1.3650, but there are not enough
people (or no one at all) willing to sell their Euros for 1.3650 USD, our order will need to look at
the next best available price(s) and buy those Euros at a higher price, giving us negative slippage.
But of course sometimes the opposite could happen. If there were a flood of people wanting to
sell their Euros at the time our order was submitted, we might be able to find a seller willing to
sell them at a price lower than what we had initially requested, giving us positive slippage.

Rollover
In this lesson we are going cover Rollover. We will start by explaining the concept of rollover
then go into an example of how it is calculated. We will show you how to take advantage of
rollover, as many successful traders make it an integral part of their trading strategy.
Rollover is the interest paid or earned for holding a position overnight. The target interest rate
associated with each currency (generally set by that currencys Central Bank) is listed on the
home page of Dailyfx.com. Here is an example:

As we covered in reading a forex quote, any time you take an FX position you are buying one
currency and selling in the other. Your position will therefore earn the interest rate of the
currency that you have bought, and you will owe the interest rate of the currency that you sold.
The net difference will either be credited to your account or debited from your account every day

at rollover, which is 5pm Eastern US Time. Its important to note that rollover only occurs on
positions that are held open at 5pm Eastern Time. If you close a trade before the rollover time, or
open it after the rollover time, no interest will be paid or owed.
Let's take a look at an example...
When you buy the AUD/USD pair, you are buying the Australian Dollar, and selling the US
Dollar.
Here is the math:
In this example we are buying one 10k lot of AUD/USD in a US Dollar based account. So we are
going to earn 3% annually on 10,000 AUD. This comes out to 300 AUD per year. To determine
one days worth of rollover well divide by 365, which gives us 0.82 AUD in interest per day.
On the other side of the trade, we are short approximately $8,800 USD (the AUD/USD rate is
0.8780 at the time of writing). For this side of the trade, we owe 0.25% on the US Dollars that
we are short. So 8,800 *0.0025 is $22 US. Divide that by 365, and you get $0.06.
Now we know that if we buy one 10k lot of AUD/USD well earn 0.82 AUD and owe $0.06
USD. To net these two together, well first convert the 0.82 AUD to USD Dollars. To do that we
simply multiply by 0.8780 (the current AUD/USD Spot rate) which gets us to $0.72 US.
$0.72-$0.06 = $0.66. So, according to our math, we should earn about $0.66 US per day for
buying one 10k lot of AUD/USD. Now, log into your trading platform and see what the roll
amount is.
Why doesnt it match? The reason is that the interest rates that we used in our example: 3% for
the AU Dollar and 0.25% for the US Dollar, are simply the target rates set by the central banks
of those countries. Market participants (i.e. banks) will determine where the actual overnight
lending and deposit rates should be. So, unfortunately, our calculation and this example here is
just to help understand rollover conceptually. Doing the calculation based on target rates will
never get you to the exact rollover value that is charged or earned, but it is a good exercise to
understand how rollover works.
The next question that many traders ask is why do we get charged more then we can earn on
Rollover? If, for example, were long AUD/USD well earn $0.49, but if we are short we will
owe $1.07. The answer is that banks introduce a spread on the interest rates. They will pay us a
bit less than the overnight rate when we lend to them, and they will charge us a bit more then
than the overnight rate we you borrow from them. The end result is that, unfortunately, we
traders always get charged more then we earn when it comes to rollover. This is also why both
rolls can both be negative at times.
That doesnt negate the powerful impact that rollover can have on a trading strategy. Some
traders will only go into positions that will allow them to earn at rollover.

Lets look at another example.

Lets say going short one 10k lot of GBP/AUD pays us $0.81 a day in rollover. That may not
sound like a lot, but it works out to $295.65 of interest a year we will earn. And that interest is
earned even if the pair doesnt move a single pip. Also considering that we may have only had to
post around 2% or less in margin to hold that trade, $295 is a significant percentage return.
Holding a position long term to collect the interest rate differential is referred to as a carry
trade, and is one of the most popular strategies in the market.
Now we have to keep in mind that a carry trade certainly isnt risk-free. The spot rate itself will
of course fluctuate, and that can work for or against us. Also, interest rates often change and the
amount that you earn or owe each day will therefore change as well. So if you are going to be a
carry trader, be sure to stay on top of interest rate movements and sentiment.
An important thing to note is Wednesday Rollover. This can be a bit confusing, so dont worry if
you dont get it right away.
FX is generally a two-day deliverable market. That means that positions will settle 2 days from
when they are opened. Wednesday at 5pm, positions get rolled over to Thursday positions. These
positions would technically settle on Saturday. Banks are closed on Saturday, so instead they are
rolled through the weekend to Monday. So the short of it, is that Wednesday rollover is typically
3 days worth of interest. There is no rollover applied to positions that are held open on Saturday
and Sunday. Holidays can also affect the rollover schedule. You can easily reference the special
holidays and how they affect rollover on our regularly updated
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