Tuesday, June 9, 2009

Strategy to use when Doing Forex Trading

Many of newbie or beginning traders usually don't fully understand the concept of leverage. Basically, if you or your partner have a start up trading capital of $1,000 and if you trade on a 1:50 margin you can effectively and legally control a capital up to of $50,000. However, here is the big draw back, a two percent move minus or against you and your trading capital is completely wiped out to zero. If you are a beginning in forex trader you should not use more than 1:20 margin well at least until you can get comfortable and profitable and after then and only then you can attempt to use higher margins.

Most Question is What does 1:20 margin mean? It means that with your $5,000 you will control a capital of $100,000. Let's say we are going to trading the currency pair EUR/USD and by using our entry and beginer strategy you have decided to enter the trade on a long side. That means that you are betting that USD will depreciate against Euro. and will make proffit of the forex

Let's say current EUR/USD rate is for example 1.455. Again, if your trading capital is $5,000 and you are using 1:20 leverage basically you will effectively be exchanging $100,000 to Euros. which mean If the current rate is 1.455 you will receive 100,000/1.455 or about 68,728 Euros.

If the trade goes well in your direction margin will work very good in your favor and 1% decline in USD will mean 20% increase in your start up trading capital. So if EUR/USD rate moves from 1.455 to 1.469 we will be able to exchange your 68,728 Euros back to $101,000 for a profit of $1,000. and the profit is high. Since your start up trading capital was $5,000 it is effectively a 20% increase in your account. However, if the trade went against you and USD appreciated 1% vs. Euro your account would be reduced to $4,000. this will be good for forex strategy

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