Centrio Global Ltd

Forex risk management trading strategies

Centrio Global Ltd — Tue, 10 Dec 2019 21:34:04 +0000

Excitement, anxiety, disappointment, and elation – these are some examples of the emotions that can be experienced when trading, sometimes all within the space of the first few minutes!

Welcome to the world of retail forex trading where there will be highs and lows in what can be a rewarding but challenging pursuit for seasoned traders or beginner investors alike.

One of the main challenges is knowing how to effectively manage the risk on your trading account. Because while profitability when trading is the key objective, equally important, is the ability to protect your capital when faced with unfavourable market moves. Effective use of Stop Loss and Take Profit orders as part of an overall trading strategy is a simple way to do this.

But before entering a trade, it’s important to ‘do the maths’ and ask yourself two fundamental questions:

How much of my account value am I willing to risk on the trade?
How much profit am I looking to target?

By answering these questions, you can determine where to place your Stop Loss and Take Profit targets.

In this article, we will discuss what risk management is and why it is important, as well as some of the most commonly used risk management strategies that can help you improve your trading performance. But first, let’s kick off with the basics!

What is risk management in forex trading?

Risk management is one of the most important components of a trading plan and it can make the difference between gambling and trading. Placing trades without consideration of the risks involved is gambling. On the other hand, trading is all about taking calculated risks – trying to minimise losses while maximising profits.

Risk management is essentially a set of rules that are designed to minimise your losses and maintain a reasonable risk/reward ratio when placing trades.

Basics of forex risk management

First of all, you should understand what type of trader you are and understand your own risk appetite. Some traders are keen to take larger risks in exchange for a higher potential profit. On the other hand, some traders are more risk-averse and prefer to keep their risk low.

Identifying your risk appetite will help you determine how much you should risk per trade. While aggressive traders might risk 2-3% of their account balance per trade, conservative traders might prefer to go for 0.5-1.0% per trade.

What are the risks of FX trading?

One of the biggest risks in forex trading is leverage. While leverage can help you increase your profits, it can also magnify your losses. There is a reason leverage is often called a “double-edged sword”.

Just as a credit card can allow you to spend much more than you have in funds in your bank account, leverage allows you to control a position of a significant size compared to your actual account balance. The higher the leverage, the higher the risk that you could lose all your capital.

Another risk is liquidity. One example of this is the market opening on Sunday evening (NY Time). Liquidity will be extremely thin and there is a serious risk of a significant weekend gap. Traders can be caught by surprise, especially if there was an unexpected event that occurred over the weekend while the market was closed. However, liquidity can disappear even during weekdays, when the markets are open. This exposes traders to slippage when entering and closing positions.

Furthermore, technology risk can also affect traders. It could be minor issues such as the internet connection in your home failing. While this would have been a disaster for traders two decades ago, most traders have a version of their trading platform installed on their mobile devices. On the other hand, your broker may experience a major outage, which could prevent you from accessing the platform and therefore managing your positions. This would be a far more serious issue, as you would be unable to control your positions regardless of which device you are using. Luckily, such outages are rather rare and are quickly fixed.

Risk management strategies in forex trading

Once you have a good idea about your personal risk appetite, you should start incorporating risk management into your trading plan. This means defining how much you want to risk per trade and planning your entry and exit strategies.

Trading without a stop and/or taking profit can be dangerous, especially for beginners. You could be tempted to break your rules and let the losing positions run in the hope they will turn profitable in the end. Having well-defined rules and a stop-loss order in place can help you manage your risk efficiently.

Ultimately, emotions cannot be eliminated from trading, but they can be controlled with enough practice. Having a clear trading plan will help you accomplish this as you will become more disciplined over time.
With this, it is important to have realistic expectations about what you can achieve. You cannot achieve a monthly return of 50% without taking excessive risks and the risk of blowing up your account is significant. Having more realistic goals – such as achieving a return of e.g. 3% per month – will help you keep your emotions under control.

Furthermore, you should not limit yourself to only one market. If you are using a trend strategy but the forex market has been in a stubborn consolidation phase that just won’t end, it might be time to look at other asset classes such as shares, cryptocurrencies, commodities, or indices.

How to manage risk in forex trading?

Example trade: AUDUSD

Let’s assume you have AU$10,000 in your trading account. You’ve decided that you think the AUDUSD rate is going to go higher, so you want to buy this currency pair.

You’ve also decided to use 5% of your trading account value as a margin requirement to cover this trade, which equals an amount of AU$500 (10000 x 0.05 = 500).

You then decide to trade AUDUSD at a margin rate of 1%, or in other words, using a leverage ratio of 100:1. This means that with AU$500 worth of margin, you can open a position size of 50,000 AUDUSD (500 is 1% of the overall position size, so multiplying this by 100 will give us the total position size of 50000).

To enter the trade using a 1% margin rate, you place a Market Order to buy 50,000 AUDUSD @ 0.7250, which is the current market price.

How much of my account value do I want to risk on the trade?

After working out how much margin you want to use (which then determines the trade size), you need to work out how much of the account balance you’re willing to risk on the trade. The answer to this will vary from trader to trader, and it will depend on your risk tolerance.

A general rule of thumb is to not risk more than 2% on any one trade. Once you’re comfortable knowing how much of your account you’re willing to risk, you can then work out where to place your Stop Loss order.

Back to the trading example – if there’s AU$10,000 in the trading account, and you’re using AU$500 as a margin to open a long 50,000 AUDUSD position, using 2% as the guideline means you’re willing to risk losing AU$200 on the trade.

At this point, it’s worth remembering that profit and loss on a trade are generated in terms of the secondary currency, which in this case is the US Dollar (because it’s listed second in the AUDUSD pair). So, before placing a Stop Loss, you need to work out what the equivalent of AU$200 is in USD. Based on an exchange rate in this example of 0.7250, the answer is US$145 (200 x 0.7250 = 145).

In a trade size of 50,000 AUDUSD, every 1 pip movement (a movement in the 4th decimal place for AUDUSD) equates to a profit/loss of US$5 (50,000 x 0.0001 = US$5). If you’re willing to risk AU$200, which is US$145, it means our Stop Loss should be placed 29 pips away from the entry price (145/5 = 29 pips).

Therefore, based on the trade entry price of 0.7250, a Stop Loss would then be placed 29 pips away (or 0.0029) at 0.7221 (0.7250 – 0.0029 = 0.7221).

Using a Trailing Stop can also be a good choice, as the Stop will ‘trail’ favourable price movements while limiting the scope for downside losses.

For example, a Trailing Stop loss could be set with an initial level at 0.7221, but with a trailing level of 29 pips, meaning that under certain conditions (such as the price moving higher but not high enough to trigger your Take Profit order) you could then be stopped out at your entry point of 0.7250 with a zero loss. But it’s worth remembering that there are advantages and disadvantages to using Trailing Stops, so while there are situations where they will add another level of protection to your capital, they can potentially also cut you out of a trade that otherwise would have triggered your Take Profit level.

Setting Take Profit price using a Risk/Reward Ratio

Once you know where to place the Stop Order (in accordance with how much you’re willing to risk on the trade), the next thing to consider is where to place the Take Profit order. The answer to this will depend upon what sort of Risk/Reward ratio you decide to have.

For the purposes of illustration, let’s assume we use a 1:2 Risk/Reward ratio, which would mean that you would be risking AU$200 in trying to achieve an AU$400 profit. In practical terms, this would mean if our stop is placed 29 pips below the entry price, the Take Profit would be placed 58 pips (i.e. double the Stop Loss distance) above the entry price at the level of 0.7308.

To recap the entire hypothetical trade set-up:

We initially placed a Market order to buy 50,000 AUDUSD @ 0.7250.
We initiated a Stop Loss at 0.7221, which would result in an AU$200 loss if triggered.
We put in place a Take Profit at 0.7308, which would result in an AU$400 profit if triggered.

In addition to using Stop Loss and Take Profit orders to manage your risk when trading, you can also make use of the Price Alerts function to stay informed of price movements.

While it’s true that we can’t control price movements in the forex market, we can control the profit and loss parameters we set up around the trade.

By setting Stop Loss and Take Profit orders in accordance with your trading objectives, you can have a risk management approach that not only allows you to take advantage of the profitable trading opportunities in the FX market but also enables you to limit the losses when trades don’t go your way. It’s all part of the highs and lows of forex trading.

What is market volatility in forex?

Centrio Global Ltd — Tue, 10 Dec 2019 21:00:00 +0000

Warren Buffett was once quoted as saying:
“Look at market fluctuations (volatility) as your friend rather than your enemy.”

While he was talking about markets in general, Buffett who is also known as the Sage of Omaha, could well be talking about volatility in the forex markets. Market fluctuations can indeed be your friend when forex trading online in the global market. But you have to know how to harness it and make it work in your favour.

What is volatility in forex trading?

In simple terms, volatility refers to the price fluctuations of assets. It measures the difference between the opening and closing prices over a certain period of time.

For example, a currency pair that fluctuates between 5-10 pips is less volatile than a forex pair that fluctuates between 50-100 pips.

If you look closely you can see that some currencies and currency pairs are more volatile than others. You must have heard of the term ‘safe haven’ which refers to some currencies like the Japanese Yen, the Swiss Franc, and the US dollar (to a certain degree).

On the other hand, emerging market and exotic currency pairs such as the Turkish Lira, Mexican Peso, Indian Rupee, and Thai Baht are considered more volatile than the safe haven currencies.

So, depending on your trading style, strategy, and trading preferences, you can always find a currency pair that will suit your trading technique. While some traders prefer volatile markets, others might not like the high risk that comes with high volatility.

How are market liquidity and volatility related?

To understand the relationship between market liquidity and volatility, you first need to understand what liquidity is.

What is liquidity?

Liquidity is a measure of how quickly/easily you can buy or sell something in the market. If you wish to buy 100 ounces of gold, there must be a market participant who is willing to sell this amount of gold to you.

In highly liquid instruments, this is not an issue. You could execute a EUR/USD trade worth 10 Million during the London market session without any difficulties and without moving the market. Timing is important though, as currencies might be less liquid during specific sessions.

For example, if you decided to execute that EUR/USD trade between the close of U.S. trading and prior to the Tokyo opening, you might find that the liquidity is not that great and you could end up with a worse execution than you anticipated.

Generally speaking, the more liquid a trading instrument is, the lower the volatility, as it takes much more to move it in a certain direction. To significantly move the US bond market or the EUR/USD currency pair in one direction, it would take a massive transaction.

On the other hand, it would take much less effort to move one of the emerging market currencies – such as the Mexican Peso or South African Rand. Those currencies tend to be more volatile for that particular reason.

Why is volatility important in the markets?

Quoting Warren Buffett again, he said: “All time is uncertain. It was uncertain back in 2007, we just didn’t know it was uncertain.”

The fact is uncertainty, volatility, fluctuations, or whatever you call the range of price movement – are all intrinsic parts of trading the markets.

No volatility means there are no price movements. And without price movement, it will be impossible to have any trading activity.

The thing to keep in mind is that a certain level of volatility is needed for markets to operate efficiently. The challenge for traders though is when volatility becomes too high.

As a forex trader, you need to be aware of which currencies are more volatile than others and when volatility is rising.

What causes market volatility of currency pairs?

Given the nature of the current global markets – interconnected trades, seamless flow of information and communication, and the prevalence of social media and digital technology – market pundits agree that market volatility is very much in every trader’s mind these days more than in any other period of time.

Let’s look at some of the factors that cause volatility that can affect your forex trading.

Geopolitical factors

Wars (military invasions), uprisings, riots, and other forms of civil unrest count as one of the major causes of volatility. This is because while a certain level of volatility is needed in the markets, a prolonged and high level of uncertainty (in the case of wars and uprisings) is not good for traders’ sentiment and the market in general.

Trade wars

Whether it’s the US vs China, the US vs Europe, or any other region or country, trade wars can also spur volatility in the markets due to the billions or trillions of transactions involved. One way or another, the currencies involved in any trade war will be affected at some stage.

Monetary policies

Central banks across the globe play an important role in managing the flow of money. They can regulate the amount of money in circulation via interest rate levels. It’s no wonder that every forex trader is keeping an eye on central bank decisions – whether it is the US Federal Reserve, the European Central Bank (ECB), Bank of England (BoE), Bank of Japan (BoJ), Bank of Canada (BoC) or the Australian Reserve Bank (ARB).

Trader and market sentiment

It is a fact that market movements are driven by the people behind them. Traders and investors around the world make markets move. And depending on the prevailing sentiment – positive or negative – market volatility can fluctuate.

What are some of the most volatile currency pairs?

There are some currency pairs that are more volatile than others. Check out some of the most volatile currency pairs below and find out what makes them see larger fluctuations.

AUD/JPY

The AUD/JPY currency pair is seen as a risk barometer. The Australian Dollar is seen as a risk-on currency, meaning it will be in demand when risk appetite is high. On the other hand, the Japanese Yen is a traditional safe haven and will catch a bid during times when the markets are in a “risk-off” mode. This makes AUD/JPY a volatile currency pair – i.e. it will rise when traders are feeling optimistic and seeking risk and fall when traders are turning risk-averse.

GBP/CAD

The British Pound cross rates tend to be the most volatile ones among the major currencies. The Canadian Dollar is another “risk-on” currency and is heavily influenced by the direction of the oil price, as Canada is a major oil producer. If markets move into “risk-off” mode and at the same time, oil prices are falling, the Canadian Dollar could come under significant pressure. On the other hand, the currency tends to thrive during times when traders are seeking risk and commodity prices are rising as well.

USD/TRY

The Turkish Lira can see significant price swings at times, which are driven by geopolitics but also due to the unpredictability of the country’s central bank and the influence of politics on its course.

Forex market volatility trading tips

Knowing the inherent nature of volatility and the factors behind it, how can you use it in your favour? How can you harness volatility in your forex trading?

If you heed Warren Buffett’s word and look at market volatility as your friend rather than an enemy, there must be ways to make it work for you and your trading success.

Use stop loss orders: If you set a stop loss level for every forex trade you take, you are giving yourself extra protection against any market volatility.
Monitor the economic calendar: If you monitor the economic calendar and know the major economic events and decisions that can possibly move the markets, you will be in a better position to anticipate volatility, at least to a certain extent. Remember that volatility is part and parcel of the markets, the challenge for you as a trader is how you react to that volatility when it comes.

Some traders prefer to stay on the sidelines when there are high-impact events that may push volatility higher. But there are also some traders who want to take advantage of the price movements around those major events. No matter what is your preference, it pays to monitor and keep track of key events that can impact your trading. Learn more about how to read the economic calendar to stay up to date on these major events.
Limit your leverage: You must be aware by now that leverage can be a double-edged sword. It can magnify your wins as well as your losses. By limiting the amount of leverage you use for your trades, you are already putting some risk management strategies in place.

What volatility indicators to use?

There are a number of technical indicators that are suited to analysing volatility in the market. Find some of the most common volatility indicators below:

Average True Range: The average true range indicator was developed by J. Welles Wilder Junior. The ATR calculates a “true range” and displays it as a 14-day exponential moving average of that particular range. The true range is the highest value of one of the following three equations:

TR = Current day´s high – current day´s low
TR = Current day´s high – previous day´s close
TR = Previous day´s close – current day´s low

A higher ATR reading indicates higher volatility.

Bollinger Bands: Bollinger bands were developed by John Bollinger. This volatility indicator shows whether prices are high or low on a relative basis. Bollinger bands consist of three lines – the lower, middle, and upper bands. The middle band is simply a moving average. The upper and lower bands are positioned on either side of the MA and are calculated as 2 standard deviations above/below the MA.

A narrowing of the bands indicates low volatility, while a widening hints at increased volatility.

Conclusion

Volatility is one of the most important concepts to know when trading the financial markets. It’s also a term that may be tossed around by investors without understanding what it means and how volatile markets actually work. By reading this article, you now know exactly how volatility works and how to trade it successfully!

Exotic currency pairs to trade in forex

Centrio Global Ltd — Sat, 09 Nov 2019 22:04:20 +0000

One of the most important aspects of trading forex is understanding currency pairs. There are a number of different types of currency pairs including majors, minors, and exotics.

Exotic currency pairs differ from the major pairs because they don’t have as much liquidity as others on the market. However, there are some exotic currencies that are worth trading for their unique price action and strategies.

Exotic currencies are also known as alternative or third-world currencies. They can offer exciting opportunities in forex trading because they have the potential for higher returns than other currencies but there are also risks associated with trading them.

In this article, we will list all the exotic currencies available to trade in the foreign exchange market and describe what makes these coins attractive for traders.

What is a currency pair?

A currency pair is the two currencies that are being traded.

For example, in FX if we wanted to trade GBP/USD, then British Pounds and US Dollars would be paired together as one unit of trade.

In the forex market, currency pairs are made up of the base currency, (also known as the transaction currency) the first currency that appears in the pair while the second currency of the pair is the quote currency or counter currency. In the above example, GBP would be the base currency and USD would be the quote currency.

Major currency pairs in forex

Major currency pairs are the most traded in the forex market because of their popularity and higher liquidity. These currencies have large economies and as a result, these pairs may be more liquid than other types of exotic currency pairs that do not share liquidity with major pairings and have the lowest spreads.

While there are eight major currencies, there are only seven major pairs. Any pair containing one of the major currencies and the US Dollar is a major forex pair.

EUR/USD
USD/JPY
GBP/USD
USD/CHF
USD/CAD
AUD/USD
NZD/USD

Minor currency pairs in forex

Minor currency pairs are the second most traded in the forex market, and are sometimes referred to as ‘crosses’. These currencies have less liquidity than major currency pairs and as a result, traders will often make more forex trades with minor currencies to reduce trading costs.

Minor pairs include the major currencies which don’t include the US Dollar. The most traded minor pairs include the Euro, Japanese Yen, and British Pound.

EUR/GBP
EUR/JPY
GBP/JPY
GBP/CAD
CHF/JPY
EUR/AUD
NZD/JPY

What is an exotic forex pair?

Exotic currency pairs are the third most traded in the forex market. These pairings include the combination of one of the 8 major currencies and a currency from a developing or emerging economy. There are also many popular exotic pairs amongst traders that are exotic vs exotic, such as NOK/TRY or TRY/RUB.

Exotic forex pairs can provide you with an opportunity to diversify your trading. Exotic currencies have a higher level of volatility, which increases the risk of trading them, but also offers the chance of finding trading opportunities should there be none in the major FX pairs. Further, emerging market currencies offer a higher level of interest rate, which can make them attractive for carry trades.

As an example, an exotic currency pair would be formed with a combination of an exotic currency, such as the South African Rand (ZAR) or Swedish Krona (SEK), paired with a major currency, such as the Euro (EUR) or US Dollar (USD). These pairs can also feature an exotic against an exotic, such as the Turkish Lira (TRY) and Singapore Dollar (SGD).

List of exotic currency pairs

The table below includes all the exotic forex pairs available to trade with Centrio Global. Find more details about all the forex currency pairs in our product schedule.

AUD/NOK (Australian Dollar/Norwegian Krone)
AUD/PLN (Australian Dollar/Polish Zloty)
AUD/SEK (Australian Dollar/Swedish Krona)
AUD/SGD (Australian Dollar/Singapore Dollar)
CAD/SGD (Canadian Dollar/Singapore Dollar)
CHF/SEK (Swiss Franc/Swedish Krona)
CHF/SGD (Swiss Franc/Singapore Dollar)
EUR/CZK (Euro/Czech Republic Koruna)
EUR/HUF (Euro/Hungarian Forint)
EUR/NOK (Euro/Norwegian Krone)
EUR/PLN (Euro/Polish Zloty)
EUR/RON (Euro/Romanian Leu)
EUR/RUB (Euro/Russian Ruble)
EUR/SEK (Euro/Swedish Krona)
EUR/SGD Singapore Dollar)
EUR/TRY (Euro/Turkish Lira)
EUR/ZAR (Euro/South Africa Rand)
GBP/CZK (British Pound/Czech Republic Koruna)
GBP/HUF (British Pound/Hungarian Forint)
GBP/MXN (British Pound/Mexican Peso)
GBP/NOK (British Pound/Norwegian Krone)
GBP/PLN (British Pound/Polish Zloty)
GBP/SEK (British Pound/Swedish Krona)
GBP/SGD (British Pound/Singapore Dollar)
GBP/TRY (British Pound/Turkish Lira)
MXN/JPY (Mexican Peso/Japanese Yen)
NOK/JPY (Norwegian Krone/Japanese Yen)
SGD/JPY (Singapore Dollar/Japanese Yen)
TRY/JPY (Turkish Lira/Japanese Yen)
ZAR/JPY (South Africa Rand/Japanese Yen)
USD/CZK (US Dollar/Czech Republic Koruna)
USD/HUF (US Dollar/ Hungarian Forint)
USD/ILS (US Dollar/Israeli Shekel)
USD/MXN (US Dollar/Mexican Peso)
USD/NOK (US DollarNorwegian Krone)
USD/PLN (US Dollar/Polish Zloty)
USD/RON (US Dollar/Romanian Leu)
USD/RUB (US Dollar/Russian Ruble)
USD/SEK (US Dollar/Swedish Krona)
USD/SGD (US Dollar/Singapore Dollar)
USD/THB (US Dollar/Thai Baht)
USD/TRY (US Dollar/Turkish Lira)
USD/ZAR (US Dollar/South Africa Rand)

What do you need to know before trading exotic currency pairs?

Most of the emerging market currencies have things in common. They are quite sensitive to changes in US interest rates & expectations, and to general risk appetite (e.g. in a risk-off environment, traders and investors will generally favour the safe haven currencies and move out of emerging market currencies).

One other thing to keep in mind when trading exotics is that they are far less liquid than majors and have higher volatility too.

According to studies in 2016 by the Bank for International Settlements, the OTC foreign exchange turnover of the USD/EUR pair made up 23.1% of daily forex transactions. To put that into perspective, one of the more popular exotic currency pairs, the USD/RUB, only had a daily trading volume of 1.1%.

Exotic currency trading strategies

There are a variety of forex trading strategies available, but no unique strategy is better than the rest. Each strategy has its own time to shine depending on the market conditions, the currency you’re trading, your trading plan and trading style, and the timeframe.

Something that has worked well now might not work as well in the future so it is always wise to reassess your trading goals and the strategies you are using. The forex market is ever-changing and that is what makes it so special and the most globally traded financial market in the world.

Try to learn as many different trading strategies as you can and spend your time focusing on a single currency until you are well-equipped, before branching out into the unknown.

There are plenty of trading styles forex traders have used in the exotics market, they can be broadly categorised by the time frame the positions are held for. Some trading style examples include:

Scalping Trading

Scalping trading is the most active form of trading as the positions are only held for literal seconds or minutes. The strategy is entirely built on technical analysis as fundamentals can not affect such a small time frame. It’s very important to select an FX broker with low commissions and fast execution times, as there need to be several hundred small trades to make a significant profit.

Day Trading

Like scalping, day traders will also use technical analysis unless a sudden geopolitical event comes to light. Day traders trade positions within the day and don’t typically hold positions overnight. They also require generally fast execution and low commissions to make a profit from their trades which can sometimes result in a loss.

Swing Trading

Swing trading is the next natural step of the trading styles. Here, the positions are held from several days to weeks. The analysis can be a mix of technical and fundamental analysis as both can affect the pricing in this time frame. As the positions are only entered and exited once in a while, this can be a practical trading style for FX traders looking to enter the forex market part-time.

Position Trading

This is the trading style with the longest time frame. Typically, the positions are held across months or even years. Forex position trading is mostly driven by fundamental analysis and closely resembles traditional stock trading. Here, the most important criteria for your broker needs to be their trustworthiness and the fact that they won’t shut down for a long time to come

Pros and cons of trading exotic currency pairs

There are both pros and cons to trading exotic pairs in forex, and many experienced traders can tell you that they have seen the highs and lows in this section of the market. There are many benefits to forex trading in general, and the ability to trade a variety of exotic currencies from around the world is one of them.

Before you start trading exotic forex pairs, refer to the pros and cons below:

Pros:

Fewer market forces: They usually have a lower correlation with other financial instruments such as stocks and bonds, which can make them less affected by macroeconomics.
Volatility: Exotic pairs can be a lot more volatile than majors and minors, and while this can be a bad thing it can also be a good thing with a higher opportunity for profit.

Cons:

Less liquidity: With less money moving around an exotic currency pair, the harder it will be for you to enter and exit a trade at the price you want.
High spreads: More capital might be required to trade exotics to compensate for the higher spreads.
Volatility: The increased volatility as mentioned above can be good but also bad, with high risk and the chance to suffer more losses.
Devaluation risk: Exotics can be prone to big shifts when governments change policies without warning. Central banks or market events can rapidly depreciate a developing country’s currency.

Should you trade exotic currencies?

If you are fairly new to the world of currency trading then starting with exotic currencies is not the best option. They are far less liquid than the majors and minors and also have higher spreads.

To start your journey as a forex trader, it is better to trade currency pairs from the major and minor groups as there is more trade activity for these pairs and you’ll find lower spreads. For more experienced traders, exotic pairs can be riskier but these risks could potentially pay off, as long as you know what you’re doing.

Which currencies should you trade exotic currencies against?

The only way to trade exotic currencies is if you are trading against a major currency. The reason for this is that there isn’t enough liquidity in these minor pairs and it would be difficult to find someone willing to take the opposite side of your trade.

It would also be difficult to find a broker that offers a currency pair including two exotic currencies, and if there was a broker out there that did offer it, the spreads would be quite large.

Countries that are in or close to Europe are generally traded against the Euro, while other exotic currencies would be traded against the USD. Examples would include EUR/TRY (Euro/Turkish Lira) and USD/ZAR (US Dollar/South Africa Rand).

Where can someone trade exotic currency pairs?

Exotic currency pairs can be traded at any forex broker, with some brokers offering a larger variety than others. With Centrio Global, you can trade over 40 exotic currency pairs with spreads ranging from 1.2 to 189.

How to read forex charts?

Centrio Global Ltd — Mon, 04 Nov 2019 21:11:15 +0000

Before charts became the norm, traders only looked at the ‘tape’ or raw price movements to analyse the markets. This is called ‘reading the tape’.

But with the advent of charts, most traders utilise them for an easy and graphical interpretation of market movements. Charts can also show patterns, trends and other visual signals that can help traders identify trading opportunities.

In this article, we’ll discuss the three most commonly used forex chart types used by technical analysts and traders, while also highlighting some of their advantages and disadvantages. By the end of this article, you will know how to read forex charts and be able to identify which chart types work (or don’t work) for you.

Before that, let’s deep dive into exactly what the different types of trading charts are.

What is a price chart?

A price chart is a visual representation of a particular instrument’s price over a set period of time – this could be a currency pair in forex trading, stock indices, precious metals or any other financial assets.

Price charts are one of the most important tools for beginner traders to learn. They must understand how they work in order to conduct a technical analysis of the market they are looking to trade in. The chart visualises a set period of time where trading activity is happening on the asset – anywhere between one minute to a day or a full week.

The charts have an x-axis (horizontal axis) representing the time scale, while the y-axis (vertical axis) represents the price scale. By incorporating technical indicators and analysing the chart from left to right (where the most recent price change is shown on the right side of the chart) traders can identify patterns and make an assessment on the probability that the asset will increase or decrease.

What is a forex chart?

A forex chart shows the changing price of selected currency pairs over time. Exactly like other price charts, the x-axis shows the time while the y-axis represents the price.

The below image is an example of a forex chart using the EUD/USD currency pair.

How do chart timeframes work?

The chart timeframe can be selected to showcase the trading data on the financial instrument you are analysing – for example a specific currency pair.

The trading platform you are using will likely have a default timeframe of one day but you can change it to reflect whatever amount of time you would like, from as low as one minute to as long as one month.

For example, if you were to change the timeframe to one hour, each point on the chart would now represent an hour’s worth of trading data, whether it be on a bar, line or candlestick chart.

How to access live price charts?

Once you understand what a price chart visually represents, you need to know where you can find this essential tool. These charts showcase buying and selling trading activity happening in the market in real-time for whatever financial instrument you want to view.

To be able to access live forex charts you will need to log in to the MetaTrader 4 trading platform. To do so, either sign up for a live trading account or a demo trading account to experience a replica trading environment showing the same data in real time.

Different types of forex trading charts

There are many different types of charts used in forex analysis and any type of technical analysis related to a financial asset. Depending on the trading style or type of analysis, one chart may serve you better than another.

The three most popular types of forex charts are:

Line charts
Bar charts
Candlestick charts

Line chart

Line charts are the easiest chart type to read. They show you the close price for a given time period, typically represented by a continuous curved line that connects dots that represent the changes in price over certain intervals of time.

Line charts give a clear, simplified view of the current market situation and they work best for people who want a quick glimpse of where the market is heading. This type of chart is ideal for new traders who require simplicity and clarity, and it also teaches them basic chart reading skills which they can later develop to more advanced levels using candlestick charts.

To closely monitor their trading strategies, experienced traders usually require more information than a standalone line chart offers. Unlike the candlestick chart, which displays the daily open, close, high and low prices of the asset, the line chart only offers the closing price point, where a lot of strategies will require more data than that.

Pros

Cons

Simplicity

Easy to understand even for beginners

Does not show gaps

An example will be the price gap between Friday’s closing price & Monday’s opening price

Good for graphic analysis

Straightforward depiction of support and resistance levels and easy-to-determine patterns

Does not give full information

In comparison to the other charts, does not show other details concerning what happens during the day

Bar chart

Bar charts (also known as OHLC charts) are an upgraded version of the line chart, offering information on the ‘Open’, ‘High Low’ and ‘Close’ prices – hence the abbreviation.

They are typically represented by a vertical line with two horizontal lines to the left and right. The two horizontal lines depict the open price and closing price, while the top and bottom of the vertical line indicate the highest price and lowest price reached during the given time frame. Bar charts can be used to represent any period of time, ranging from as little as a few seconds to a week or more.

Due to each bar representing a period of time, different timeframes will be useful for investors with various strategies and goals. A long-term investor may find it more beneficial to use a week timeframe, while day traders will utilise a much shorter time frame like 30 seconds, one minute or five minutes.

Pros

Cons

Comprehensive

Gives an excellent view of the Open, High, Low, and Close of the price

Range dominates visuals

The open/close level of each bar is harder to notice when the chart is full of bars

Provides insights into trends and patterns

Able to observe the contraction and expansion of price ranges during trends, over a given range of time

Candlestick chart

The candlestick chart is one of the most popular chart types used by traders. The origin of candlestick charts (sometimes referred to as Japanese candlesticks) dates back to 18th-century Japanese rice traders, who came up with this chart for the purpose of analysing the rice markets.

Candlesticks are made up of two separate parts known as the body and the shadows. The top and bottom of the body tell us the opening and closing prices during the given time period. The top and bottom of the shadows tell us the highest and lowest prices reached during the given time period.

The top and bottom of the candlestick body reflect the opening and closing prices in the given time period.

Typically, if the closing price is lower than the opening price, the candle body will be red or black. If the closing price is higher than the opening price, the body will be green or white.

In this case, black candlesticks tell us that the price is declining, while white candlesticks tell us that the price is increasing.

While red and green or black and white are the most common colours to depict price movements up and down, these colours can be easily customised.

Pros

Cons

Comprehensive

Similar to bar charts, it gives an excellent view of the Open, High, Low, and Close of the price

Overwhelming

Might seem like an information overload to a beginner trader

Able to identify trends and connect psychology with the price pattern

There is a full reference below of 1 bar to 4 par battens which helps traders make judgements on the future direction of price

Mountain chart

A mountain chart is very similar to a line chart, where it still follows the close price but underneath the line, the area is shaded (the shadow of the line gives the appearance of a mountain.

What is the best chart for forex?

The most commonly used forex chart is the candlestick chart. Every trader has their own preference but candlestick analysis can provide a clear read on the current sentiment of the market.

Why are candlesticks so useful?

Compared to line and bar charts, candlesticks capture the most information and depict the broadest picture of price changes over a fixed time frame.

You can tell the emotions behind price movements e.g. long “wicks” can reveal strong support and resistance levels if observed on longer periods and can show violent movements within a single day.

What are support and resistance levels?

Support and resistance levels are areas where the price of a currency pair is likely to reverse or stage a breakout.

A support level is a level where the downward price trend of a currency pair pauses as buying demand increases, so the trend reverses and turns upward. The same reasoning applies to resistance levels where the upward price momentum of a currency pair weakens and the price is likely to reverse and head downward. Support and resistance levels can provide excellent opportunities for traders to open new trades.

What are the benefits of using charts?

Familiarising yourself with different chart types can enhance your trading as they deliver many benefits, including:

Visual illustration of price movement can help identify important trends and patterns.
Helping you spot entry and exit levels that may not be obvious without a chart.
Market sentiment and trader psychology – represented in extreme price movements –are captured in chart patterns.
The ability to be used in conjunction with fundamental analysis to confirm trade entry and exit levels.
Use of historical data to provide a perspective of price movement over different time frames.

What are the main forex timeframes for charts?

Many different timeframes are used by traders depending on their forex trading strategy, though in the forex market timeframes can be split into three common options: long-term, medium-term and short-term. It’s up to the trader to pick the best timeframe for what they are trying to achieve.

Some traders like to utilise a technique called multiple time frame analysis: rather than selecting just one timeframe, they will view the currency pair under different time frames. Generally, the trader will use a longer timeframe to identify a longer-term trend, while a shorter timeframe is used to find a better entry into the instrument.

Refer to the table below to see the different trading styles and how they match up with the best-suited timeframes on forex trading charts.

Chart	Day Trading	Swing Trading	Position Trading
Trend Chart	30m – 4h	Daily	Weekly
Trigger Chart	5m – 60m	2h – 4h	Daily

Now that we’ve explored the three main types of charting, you should be able to identify which ones suit your type of analysis the best.

While they all serve the same function – i.e. to indicate where a price has been and currently is – there

Understanding pips and pipettes in forex trading

Centrio Global Ltd — Sat, 12 Oct 2019 21:50:05 +0000

If you are new to the world of forex trading, you may be wondering what a pip is. Short for “points in percentage”, pips are the smallest incremental move that a currency pair can make.

‘Pips’, ‘spreads’, and ‘pipettes’, are all common forex terms that new aspiring forex traders need to wrap their heads around.

In this guide, we will explain how a pip works, how to calculate a pip and what’s the difference between a pip and a pipette.

Keep reading and take your time with this information, it is critical knowledge for all new traders entering the market to know exactly how forex trading works.

What is a pip in forex?

A pip is the standardised unit measuring a change (both gains and losses) of a currency pair in the forex market. It is the smallest increment in the value of an exchange rate between a currency pair.

A pip, also known as a “point” in currency trading, is worth 1/100th of one cent on most exchanges. Forex traders typically use pips to calculate profits and losses when dealing with forex trading transactions.

What does pip stand for?

‘Pip’ can stand for ‘percentage in point’ or ‘price interest point’ within the forex market.

How do pips work?

A pip measures the amount of change in the exchange rate of a currency pair, calculated using its 4th decimal (in JPY pairs, it is calculated using the 2nd decimal).

It is important to note that pips do not represent any actual cash value – that depends on the position size of the trade, which would affect the pip value.

Example of a pip using a major currency pair

In the EUR/USD currency pair, pip movement from 1.1080 to 1.1081 is an increase of 1 pip.

Pip is calculated using the 4th decimal point

A trader that is going to buy the EUR/USD will profit if the euro increases in value against the US dollar. If the trade was entered at 1.1081 and exited at 1.1126, they would have made:

1.1126 – 1.1081 = 45 pips

However, if the trade went the opposite way, the trader would have suffered a loss.

Example of a pip using Japanese Yen pairs

In the USD/JPY currency pair, pip movement from 10.44 to 10.43 is a decrease of 1 pip.

Pip is calculated using the 2nd decimal point in Japanese Yen pairs

A trader that is going to buy the USD/JPY will profit if the dollar increases in value against the Japanese Yen. If the trade was entered at 10.43 and exited at 10.96, they would have made:

10.96 – 10.43 = 53 pips

If the market went the opposite way then the trader would have seen a loss.

What is a pipette in forex?

Pipettes are fractional pips. It is 1/10 of a pip, usually calculated using the 5th decimal (in JPY pairs, it is calculated using the 3rd decimal).

Example of a pipette using a major currency pair

In the EUR/USD currency pair, a movement from 1.10811 to 1.10812 is an increase of 1 pipette.

Pipette is calculated using the 5th decimal point

Example of a pipette using a Japanese Yen currency pair

In the USD/JPY currency pair, a movement from 10.433 to 10.432 is a decrease of 1 pipette.

Pipette is calculated using the 3rd decimal point in Japanese Yen pairs

What is the pip value?

A pip value is defined by the currency pair being traded, the exchange rate of the pair, and the size of the trade.

The pip value is usually referred to when referencing the performance of a position to attribute price to forex trade, whether it’s a loss or gain.

How to calculate the value of a pip?

To calculate the value of a pip you must first multiply one pip (0.0001) by the lot or contract size. Standard lots are 100,000 units of the base currency, while mini lots are 10,000 units.

Using EUR/USD again as our example, one pip movement using a standard lot will be equal to $10 (0.0001 x 100,000).

Pip value = 100,000 (standard lot) x 0.0001 (one pip)

________

Pip value – $10

With each pip movement in favour of the trade, this translates to a $10 profit, while every one pip movement that goes against the trade will be a $10 loss.

Tip: Due to the variation in exchange rates, the value of a pip will be different across currency pairs.

What is a spread in forex?

A spread is defined as the difference between the bid and ask price of a currency pair.

Spreads are not unique to forex as many other markets use this term to calculate the difference between the bid and ask price, including indices, commodities, and cryptocurrency to name a few.

To see forex spreads in action, check out our live forex rates and watch the difference in spread between standard and pro accounts in real time.

How to calculate spread in forex?

Before looking at any spread, a beginner trader must understand the concept of bid and ask price.

The “bid” is the price at which you can sell the base currency, whereas the “ask” is the price at which you can buy the base currency. The bid and ask prices can be found inside the MetaTrader 5 trading platform.

As seen in the image above, EUR/USD has a bid price of 1.10703 and an asking price of 1.10714.

Given that 1 pip in a EUR/USD pair is in the 4th decimal place (0.0001), this would mean that this EUR/USD quote has a 1-pip spread.

What is the difference between a pip and a pipette?

A pip relates to movement in the fourth decimal place while a pipette is used to measure movement in the fifth decimal place. A pipette is a ‘fractional pip’ as it equals a tenth of a pip.

When looking at the difference between pip and pipettes in currency pairs involving the Japanese Yen, the pip relates to the second decimal point, and the pipette is the third decimal point.

How many pips a day do forex traders make?

There is no set amount of pips you can make daily and will depend on your technical analysis, fundamental analysis, forex trading strategy, and ultimately, what way the market moves.

All traders want every day to be profitable but in the real world that doesn’t exist as forex trading is very much a high-risk game. Stick to your trading plan, trial and innovate new strategies, and practice proper risk management techniques.

What are ticks and points?

A ‘tick’ is similar to a pip, but it may not measure every increment equally. For example, a tick on one instrument may be measured in increments of 0.0001 whereas another instrument may be measured in increments of 0.25.

A tick is simply the smallest increment a particular instrument can move in, and the terminology is usually used in securities or indices trading.

A point is another unit of measurement, used when there is a shift in the dollar amount. For example, if a share price went from $25 to $30, traders would say it has moved 5 points.

This term is also used in forex in place of ‘pipette’, to refer to the movement of the 5th decimal place.

Forex Trading for Beginners

Centrio Global Ltd — Sat, 18 May 2019 19:26:00 +0000

Forex

[for-eks] –noun

is a commonly used abbreviation for “foreign exchange”. It is typically used to describe trading in the foreign exchange market, especially by investors and speculators.

What is Forex? And Why Trade It?

You may not know it, but forex is actually one of the largest markets in the world, with over $4 trillion in average daily volume transacted.

This easily dwarfs the stock market. All the world’s stock markets combined average only about $84 billion per day.

So, if forex is so big, why have so few people heard of it?

The simple answer is you have probably used the forex market before, either directly or indirectly. Any time you take a trip to another country and exchange money, you just made a forex trade.

Whenever you buy something in a shop that was made in another country, you just made a forex trade. You paid in your own currency and the manufacturer was paid in a different currency.

“…you have probably already used the forex market before – directly or indirectly.”

People trade currencies all the time, but how can currency be an investment? Here’s a simple example. Imagine that you took a trip from the United States to Europe in 2002. For the trip, you changed your US dollars into euros. At the end of a trip, you typically would change any extra euros back into US dollars. But what if you didn’t?

In 2002, one euro was worth about 90 US cents ($0.90). Say that you decided to hold on to 500 euros, and left them sitting in your desk drawer for 5 years. In 2007, you took your euros to the bank and sold them for a 2007 price of $1.40. Since you bought the euros for $0.90 and sold them for $1.40, you made a $0.50 profit per euro. You would have made $250 just because you held on to those euros and had bought and sold at the right time. That’s a 55% return in 5 years.

The $4 trillion forex market mostly runs on the same idea. Many of the world’s giant banks, hedge funds, and insurance companies actively trade currencies as a way to make money. Since they do so in very large amounts, they record profits and losses in the millions every day for the smallest fraction-of-a-cent movements in exchange rates.

Many have not heard of the forex market because the market has historically been largely exclusive to industry professionals. The average person could buy a stock but couldn’t trade currencies. So it remained solely in the hands of the big boys.

Things have changed
Like the online stock trading revolution of the 1990s, the Internet has brought forex trading within reach of the average person sitting at home.

Thousands of individual traders around the world can now trade currencies from their living rooms, with nothing but a computer, an Internet connection, and a small trading account.

You can now make trading and investment decisions to buy and sell British pounds or Japanese yen at any time, day or night (Sunday through Friday). This brief guide will show you how. But first, it’s important to know why you should trade forex.

Why Trade Forex?

Online forex trading has become very popular in the past decade because it offers traders several advantages.

Forex never sleeps: Trading goes on all around the world during different countries’ business hours. You can, therefore, trade major currencies any time, 24 hours per day, 5 days a week. Since there are no set exchange hours, it means that there is also something happening at almost any time of the day or night.
Go long or short: Unlike many other financial markets, where it can be difficult to sell short, there are no limitations on shorting currencies. If you think a currency will go up, buy it. If you think it will fall, sell it. This means there is no such thing as a “bear market” in forex–you can make (or lose) money any time.
Low Spread cost: Most forex accounts trade without a commission and there are no expensive exchange fees or data licenses. The cost of entering a trade is the spread between the buy price and the sell price, which is always displayed on your trading screen.
Unmatched liquidity: Because forex is a $4 trillion a day market, with most trading concentrated in only a few currencies, there are always a lot of people trading. This makes it easier to get in to and out of trades at any time, even in large sizes.
Available leverage: Because of the deep liquidity available in the forex market, you can trade forex with considerable leverage (Up to 1000:1). This can allow you to take advantage of even the smallest moves in the market. Leverage is a double-edged sword, of course, as it can significantly increase your losses as well as your gains.
International exposure: As the world becomes more and more global, investors hunt for opportunities anywhere they can. If you want to take a broad opinion and invest in another country (or sell it short!), forex is an easy way to gain exposure while avoiding vagaries such as foreign securities laws and financial statements in other languages.

So, let's start with what a basic forex trade looks like

Putting Your Ideas into Action

Currencies trade on an open market, just like stocks, bonds, computers, cars, and many other goods and services. A currency’s value will fluctuate depending on its supply and demand, just like anything else. If something increases supply or lowers demand for a currency, that currency will fall. For example, when Greece threatened to default on its debt, it threatened the existence of the euro, and investors around the world rushed to sell euros.

“A currency’s value will fluctuate depending on its supply and demand, just like anything else.”

With a sudden dramatic rise in the number of euros for sale and a definite lack of demand for them, the euro dropped precipitously against the US dollar and other currencies.

The best thing about forex is that you can buy or sell at any time and in any order. So, if you think the eurozone is going to break apart, you can sell the euro and buy the dollar. If you think the Federal Reserve is printing too much money, you can sell the dollar and buy the euro.

When looking at the future, many traders will have an opinion on where a currency is going. If a trader is optimistic and thinks a currency will rise, he is said to be “bullish”. If the trader is negative and expects a currency to fall, he is said to be “bearish”. Every day, the bulls and the bears do battle and the price moves as one or the other gets the upper hand.

Our job as forex traders is to look at the currencies available to us and to buy the strongest while selling the weakest. So, if after reading the news you became bearish of euros and bullish of US dollars, you could trade that opinion by selling euros and buying US dollars.

Reading a Quote and Making a Trade

Because you are always comparing one currency to another, forex is quoted in pairs. This may seem confusing at first, but it is actually pretty straightforward. Below is an example of a EUR/USD quote. It shows you how much one euro (EUR) is worth in US dollars (USD).

If you, instead, wanted to look at the euro in terms of the Japanese yen (JPY), you would look at the EUR/JPY rate. If you wanted to see the value of a US dollar in Canadian dollars (CAD), you would look at the USD/CAD.

The first currency in a currency pair is the “base currency”; the second currency is the “counter currency”. When you buy or sell a currency pair, you are performing that action on the base currency. So, if you are bearish of euros, you could sell EUR/USD. Now, when selling EUR/USD, you are not only selling euros, but are buying US dollars. If you are more bullish on the Japanese yen than you are on the US dollar, you could sell the EUR/JPY instead. It’s all up to you.

Let’s say that you sell EUR/USD at 1.4022. If the EUR/USD falls, that means the euro is getting weaker and the US dollar is getting stronger. Say the EUR/USD falls to 1.3522. In that case, you would have a profit. If it rose to 1.4522, you would have a loss. So just remember: if you sell a pair, down is good; if you buy the pair, up is good.

But I don't have any euros. How can I sell them?

You can buy or sell anything you see active on your trading station, even if you don’t have any of that currency. When trading forex, you are speculating on the change in rates. You do this by borrowing the euros. This is standard for most forex traders. This also allows you access to leverage, which can increase your profits and your losses.

So, let’s look at the example again. When you sell EUR/USD, you borrow 1,000 euros and sell them to someone else in the market, earning the equivalent in US dollars. Say you did this while the EUR/USD is at 1.4022. In that case, you borrowed 1,000 euros, sold them for $1,402.20, and held on to those US dollars.

Two weeks later, you sold those US dollars when the rate was 1.3522. Since the EUR/USD price has fallen, you get more euros back at the end than you borrowed. So, you return the 1,000 euros you borrowed, and the remaining €36.98 is your profit to keep. If the price had risen to 1.4522 instead, that €36.98 would instead be a loss. Your trading station will do the math for you and apply the profit or loss directly to your account.

SO REMEMBER:

Buy currencies that are going up. Sell currencies that are going down. Find the best pair to do that with.

Pips, Profit, Leverage, and Loss

Over the years, professional forex traders have come up with some shorthand to make forex trading easier so you can quickly make decisions about your trading without needing to take out a calculator every time.

What is a "Pip"?

A pip is the unit you count profit or loss in. Most currency pairs, except Japanese yen pairs, are quoted to four decimal places. This fourth spot after the decimal point (at one 100th of a cent) is typically what one watches to count “pips”. Every point that place in the quote moves is 1 pip of movement. For example, if the EUR/USD rises from 1.4022 to 1.4027, the EUR/USD has risen 5 pips.

“Stock indices have ‘points’, futures have ‘ticks’, forex has ‘pips’.”

The monetary value of a pip can vary according to the size of your trade and the currency you are trading. Centrio Global demo accounts typically trade in increments or “lots” of 10,000. A pip in a standard demo account in EUR/USD is worth $1.00 per lot. If you were trading 3 lots, you would have 3 pips of profit or loss per pip the EUR/USD moves, and, therefore, $3.00 of profit or loss.

Some currency pairs will have different pip values.

FOR EXAMPLE: The EUR/JPY pips are valued in Japanese yen. USD/CAD pips are in Canadian dollars, and so on. Once again, your trading station makes it all easier by doing the math for you.

How Leverage Works

As mentioned before, all trades are executed using borrowed money. This allows you to take advantage of leverage. Leverage of 200:1 allows you to trade with $10,000 in the market by setting aside only $50 as a security deposit. This means that you can take advantage of even the smallest movements in currencies by controlling more money in the market than you have in your account.

Leverage is a double-edged sword.

While leverage can be advantageous in increasing your profits, it can also significantly increase your losses when trading, so it should be used with caution. Start trading in small sizes so that you don’t take on too much risk.

“Like with profit and loss, the trading station keeps track of margin for you.”

Used Margin (Usd Mr) is how much money you have set aside to secure your open trades. Usable Margin (Usbl Mr) is money left in your account to open new trades or to absorb losses. Always make sure that you have plenty of usable margin, otherwise you may get a margin call. If your usable margin gets low, you should close some trades or deposit money into your account.

How to Develop a Strategy

So, you now know what forex traders do all day ( and all night! ). Seems pretty simple, right? Buy rising currencies and sell falling ones.

Becoming a Knowledgeable Forex Trader

Once on the demo, you’ll start to get a feel for how it all works. You can start buying the currencies you think will rise and selling the ones you think will fall.

But how do you know which currencies will rise and which will fall?

Over the years, forex traders have developed several methods for figuring out how far currencies will go.

Fundamental Analysis: Since currencies trade in a market, you can look at supply and demand. This is called fundamental analysis. Interest rates, economic growth, employment, inflation, and political risk are all factors that can affect supply and demand for currencies.
Technical Analysis: Price charts tell many stories and most forex traders depend on them in making their trading decisions. Charts can point out trends and important price points where traders can enter or exit the market, if you know how to read them.
Money Management: An essential part of trading. All traders need to know how to measure their potential risks and rewards and use this to judge entries, exits, and trade size.

There are several important skills needed in order to become a forex trader. And like all skills, learning them takes a bit of time and practice. We have grouped all these needed skills together into an interactive trading course. You can learn how to analyze and trade the market from experienced instructors and traders. They teach using video-ondemand lessons and live office hours are available so you can get personal feedback, study on any schedule, and learn at your own pace.

And the best part is it’s free. All you need to do is show that you’re serious about getting into the world’s largest market. Open a live trading account with Centrio Global and you will become a real trader with real money. You’ll have unlimited free access to the course, as well as tool such as charts, research, and trading signals.

Best Practices of Successful Traders

Centrio Global Ltd — Sat, 11 May 2019 20:36:00 +0000

Money management is a core element of successful trading. In this regard, several key traits must be included in a trading plan to boost the chances of success. These include:

Cut losses, let profits run.
Use leverage effectively
Trade the right time of day.

Trait 1: Successful Traders Cut Losses, Let Profits Run

This trait is a cornerstone of trading success. However, it is one of the most challenging behaviours to incorporate. Nevertheless, without it, the odds of success lengthen significantly. Consider the following table:

TABLE 1

The more a trader loses, the more is required to get back to breakeven. As per table 1, it becomes impossible to recover if too much is lost.

Therefore, to become a successful trader, it is essential not to lose too much money.

Trait 1 encapsulates in a metric referred to as the risk-reward ratio.

A risk-reward of 1 implies that a trader is willing to risk $1 to make $1, whilst a risk-reward of 2 means that the trader is willing to risk $1 to make $2. The higher the value, the greater the likelihood of trading successfully. Consider the following example:

There are two traders, Tom and Jerry. Both take ten trades, and both score wins on 3 of those. Unfortunately, they also both lose on 7 of their trades. Tom’s risk-reward is 1, but Jerry’s is much better at 3.

TABLE 2

The higher risk-reward ratio enables Jerry to remain profitable even though his winning percentage is 30%.

An excellent risk-reward ratio relieves pressure regarding a trader’s winning percentage of trades.

There is a clear relationship between the risk-reward ratio and the winning percentage of trades. Considering both these variables enables traders to tweak their systems to run at a positive expectancy.

Breakeven Profit Zone

Chart 1 shows the minim win % on the x-axis and the corresponding risk-reward ratio on the y-axis needed to break even (excluding costs). A trader must ensure that they trade above the breakeven curve to be profitable. The curve labels show the win % first and then the corresponding risk-reward ratio. E.g., 50%; 1 stipulates that at a 50% win percentage and a risk-reward of 1, a trader will be on the breakeven curve (excluding costs) etc.

This observation implies that a trader below the breakeven curve is incurring losses. To rectify this, they need to adjust their y-axis or x-axis position. Most traders look for a better method to push their win % up. However, professional traders often consider the more appropriate approach is to toggle the y-axis and the risk-reward ratio. This preference is because there is no perfect system, and all systems will experience a drawdown period.

Therefore, in our above example, if Tom improved his risk-reward ratio, his net position automatically improves, all other things being equal. He may make this improvement through adjustments to stop-loss and take-profit levels.

Trait 2: Use Leverage Effectively

Many traders come to the forex market for the wide availability of leverage — the ability to control a trading position more considerable than your available capital. However, while using high leverage has the potential to increase your gains, it can, just as quickly and, more importantly, magnify your losses.

In this regard, we refer back to table 1. If leverage results in a significant loss, achieving the breakeven percentage is much more difficult. Moreover, leverage may result in a loss size that makes breakeven impossible.

Given the asymmetry between losses and profits, it should be as little a surprise that profitability tends to decrease as effective leverage increases. Consider this example:

Tom and Jerry each open a 10K account and look to trade EUR/USD (MMR $26 per 1K). Both use a 1:2 risk-reward ratio with a stop at 100 and a limit at 200. However, they use two different leverage ratios.

Above both Tom and Jerry experience the same pip decline. However, Tom’s position is highly levered and suffered a much higher loss. Recovery from this position will be harder for Tom than for Jerry.

WHICH TRADER IS MORE LIKELY TO DEVIATE FROM THE INITIAL PLAN?

When the trade went against Tom, it didn’t have room to draw down, and the usable margin quickly evaporated, pushing him close to a margin call. Jerry has appropriate leverage (and stops and limits) to allow the trade space to move back into favour.
Ultimately, the same move in the market cost Tom three times what it cost Jerry.
The higher the leverage, the greater risked on each trade. Besides the financial burden, the heavier loss likely amplifies irrational decision-making. I.e., there is a psychological burden as well.

Since profitability tends to decrease as effective leverage increases, the logical result is a positive correlation between average equity in an account and trading performance. This result is because undercapitalised accounts tend to assume a leverage position too big to withstand.

To this end, we propose a money management formula to align trading positions with account size. Whilst the formula is not absolute, and there are other risk management methods, it is a good starting point for traders to test their potential exposures:

(Trading account size x 2%)/pips to stop loss = # mini-lot position

Assuming a $10,000 account and a 50 pip stop loss:

(10,000×2%)/50 = 4 mini lots or 40,000 units of base currency
2% is a risk control mechanism.
Larger or smaller accounts may adjust this.
However, remember that the larger this is, the harder it will be to recover after a drawdown (as per table 1)

Trait 3: Successful Traders Trade the Right Time of Day

Our data on trader performance shows that traders, on average, have a lower win percentage during volatile market hours and when trading through faster-moving markets. But, conversely, traders fair better when average pip movements are smaller, yielding higher win percentages. This attribute intuitively makes sense because there is a positive correlation between risk and reward. I.e., the higher the risk, the higher the reward. Or, to put it another way, if there is no risk present, it will be impossible to profit.

Thus, there is an inherent lure if the risk is present. Traders focus on the potential reward, not the actual risk. However, the risk is a genuine and present variable. There are many ways to measure risk, with one of the most popular being standard deviation or volatility.

When a financial instrument’s standard deviation increases, its volatility increases, i.e., its risk increases. As such, there are critical times during a trading day when volatility will increase. For example, in the NFP release, volatility/risk is expected. Moreover, currency pairs have their unique risk characteristics. For instance, JPY volatility will respond to different calendar events than EUR or GBP.

Traders should consider the time of day because volatility increases the chance of loss. If the volatility is extreme, the loss suffered will burden recovery (refer to table 1).

CONCLUSION

All three traits are linked and connected. Looking after one will have a flow-through effect on the others. Therefore, when a trader focuses on all three qualities, it makes for a responsible approach to trading the markets. Moreover, trading has become a more measured and proficient endeavour. In effect, the trader treats trading as a business, not a pastime.

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Forex risk management trading strategies

What is risk management in forex trading?

Basics of forex risk management

What are the risks of FX trading?

Risk management strategies in forex trading

How to manage risk in forex trading?

Example trade: AUDUSD

How much of my account value do I want to risk on the trade?

Setting Take Profit price using a Risk/Reward Ratio

What is market volatility in forex?

What is volatility in forex trading?

How are market liquidity and volatility related?

What is liquidity?

Why is volatility important in the markets?

What causes market volatility of currency pairs?

Geopolitical factors

Trade wars

Monetary policies

Trader and market sentiment

What are some of the most volatile currency pairs?

Forex market volatility trading tips

What volatility indicators to use?

Conclusion

Exotic currency pairs to trade in forex

What is a currency pair?

Major currency pairs in forex

Minor currency pairs in forex

What is an exotic forex pair?

List of exotic currency pairs

What do you need to know before trading exotic currency pairs?

Exotic currency trading strategies

Scalping Trading

Day Trading

Swing Trading

Position Trading

Pros and cons of trading exotic currency pairs

Pros:

Cons:

Should you trade exotic currencies?

Which currencies should you trade exotic currencies against?

Where can someone trade exotic currency pairs?

How to read forex charts?

What is a price chart?

What is a forex chart?

How do chart timeframes work?

How to access live price charts?

Different types of forex trading charts

Line charts

Bar charts

Candlestick charts

Line chart

Pros

Cons

Bar chart

Candlestick chart

Pros

Cons

Mountain chart

What is the best chart for forex?

Why are candlesticks so useful?

What are support and resistance levels?

What are the benefits of using charts?

What are the main forex timeframes for charts?

Chart

Day Trading

Swing Trading

Position Trading

Understanding pips and pipettes in forex trading

What is a pip in forex?

What does pip stand for?

How do pips work?

Example of a pip using a major currency pair

Example of a pip using Japanese Yen pairs

What is a pipette in forex?

Example of a pipette using a major currency pair

Example of a pipette using a Japanese Yen currency pair

What is the pip value?

How to calculate the value of a pip?

What is a spread in forex?