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Trading FAQ

1. How can I manage my trading risk?

Stop-Loss Order

Many new traders hold on to losing position far too long hoping that the market will turn around. This often leads to huge losses or even blowing the trading account. A stop-loss order enable trader to minimise losses if a trade moves in an unprofitable direction. His/her position will be automatically closed when the price reach a predefined level.

On the other hand, when your trade moves into profit significantly, then a percentage of your profits can be “locked in” by moving the stop loss into profit.

Hedging

Hedging is a strategy used to eliminating risk of an inverse price movement against your position. For example, a trader who has 20 lots AUDUSD long position may decide to hedge entire of his/her position by shorting 20 lots of the AUSUSD. A Trader can also make a hedge against a position by using two different products. For example, a trade who has 20 lots AUDUSD long position may decide to hedge his/her position by shorting 20 lots EURUSD instead.

The goal of hedging is to avoid uncertainty and limit your risk. A perfectly hedged position will eliminate any profit made on the investment. Playing with hedging without adequate trading experience could be very dangerous too.

Position Sizing

A crucial element of trading success is taking the proper position size on each trade. For example, if a trader has $50,000 for trading, he/she must decide what percentage of that $50,000 he/she is willing to risk on any single trade. For a 1% risk, you can risk $500 per trade, even if you lose 10 trades in a row, you will still have 90% of your capital. For a 2% risk, you can risk $1000 per trade, you will have 80% of your capital if you lose 10 trades in a row. The more risk you take, the greater your potential loss or return at the same time.

Portfolio Diversification

A trader may decide to trade several products within his/her portfolio. For example, if a trader want to long USD with a $10,000 (1% risk) standard position size in money management, he could place $2,500 in AUDUSD, $2,500 in EUSUSD, $2,500 in GBPUSD and $2,500 in NZDUSD. He/she only risking 0.25% on each position.

Trading Plan

Always plan your trade before you enter the market. A trading plan normally consists of set of rules that defines entry, exit, and money management criteria.

Always follows your trade plan. Consistently following the rules of an effective trading plan is an essential element of successful trading.

Remember trading is not gambling, becoming a successful trader does not happen overnight. All trading involves risks and all traders are going to experience losses. The only way to guarantee survival in the market is to minimize your losses when they occur. A trader who follows good risk management have a much better chance become a successful trader in the long term.

 

 

2. What are the differences between market order and pending order?

 

Market Order

A market order is an order to buy or sell at the current market price. Securities are bought at the ASK price and sold at the BID price.

The advantage to using market orders is that a trader is guaranteed to get the trade filled (often instantly). If you are buying, you will be paying the asking price. If selling, you will be selling at the bid price.

The disadvantage of using a market order is that slippage can occur. As we know, the bid is always lower than the ask, and the difference between the two prices is the spread. When a trader wants to execute a trade using a market order, the trader is willing to buy at the ask, or sell at the bid. Thus, the trade is immediately out of the money by the amount of the spread. This amount may increase in the form of slippage if the market order that is placed cannot be satisfied with the current volume that is associated with the current bid/ask price quoted.

Market orders will be effective if there is good liquidity in the market(Normally in FX market). Otherwise, significant slippage could occur (eg. big slippage usually occurs around major news events).

Pending Order

A pending order is an order that was not yet executed, thus not yet becoming a trade. A pending order allows traders to buy and sell securities at a pre-defined price in the future. This type of order is used to execute a trade if price reaches the pre-defined level; the order will not be filled if price does not reach this level. There are four types of pending orders:

  • Buy Limit - an order to buy at or below a specified price. Limit orders must be placed on the correct side of the market to ensure they will accomplish the task of improving price. For a buy limit order, this means placing the order at or below the current market bid. A buy limit order is normally placed in anticipation of that the price, having fallen to a certain level, will rise. (eg. price is close to major support level)
  • Sell Limit - an order to sell at or above a specified price. To ensure improved price, the order must be placed at or above the current market ask. A sell limit order usually placed in anticipation of that the security price, having increased to a certain level, will fall. (eg. price is close to major resistance level)
  • Buy Stop - an order to buy at a price above the current market bid. A stop order to buy becomes active only after a specified price level has been reached. A buy stop order is normally placed in anticipation of that the price, once reached a certain level, will keep on rising. (eg. price break through major resistance level)
  • Sell Stop - an order to sell at a price below the current market ask. A stop order to sell becomes active only after a specified price level has been reached. A sell stop order usually placed in anticipation of that the price once reached a certain level, will keep on falling. (eg. price drop below major support level)

 

 

3. What is the difference between leverage and margin?

 

Leverage

Leverage is the use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment.

When you trading a leveraged product, the provider will ask you to put up a sum representing just a fraction of the total value of your position. Effectively, the provider is lending you the balance.

Margin

The margin is the amount the investor puts down on the account and is typically expressed as a percentage. It is always a fraction of what it would cost to buy the assets directly, but the exact size depends on various factors – a more liquid and less volatile market will require a smaller margin, whereas a volatile market may require a larger margin.

Trading with Margin

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.

A 1% margin means that for just $1 you could get the same exposure as a $100 investment. This represents leverage of 100 times.

The main benefit of leverage is that it frees up your capital, as you only have to commit a fraction of the value of the assets you are interested in. Leverage can magnify your potential profits however it is also possible to lose much more than your initial margin if the market turns sharply against you.

For Example: Assuming two traders (Trader A and Trader B) have starting balances of $10,000. Trader A has a leverage of 10 times and trader B has a leverage of 50 times.

 

Trader A

Trader B

Balance

$10,000

$10,000

Leverage

10 times

50 times

Trade Size

$100,000 (1 lot)

$500,000 (5 lots)

1% change in price

$1,000 change in value

$5,000 changes in value

2% change in price

$2,000 change in value

$10,000 changes in value

3% change in price

$3,000 change in value

$15,000 changes in value

A 2% positive price movement could double Trader B’s account balance. However, on the other hand, a 2% negative price movement could also wipe out Trader B’s entire account.

 

4. What is economic indicator?

An economic indicator is a statistic about an economic activity. Economic indicators allow analysis of economic performance and predictions of future performance. There are many indicators, and each of them differs from the other in their place of origin, target audience and effect on the various financial markets.

Economic indicators can be classified into three categories: leading indicators (signal future events), lagging indicators (follow an event), and coincident indicators(current status).

Leading Indicators

Leading indicators are indicators that usually, but not always, change before the economy changes. They are therefore useful as short-term predictors of the economy.

Examples of leading indicators:

•    Stock Market Index

•    Government Bond Yield

•    Building Permits

•    Money Supply (M2)

•    Purchasing Managers Index (PMI)

•    Durable Goods Report (DGR)

•    Consumer Confidence Index

Lagging indicators

Lagging indicators are indicators that usually change after the economy has begun to follow a trend. Typically, the lag is a few quarters of a year. Lagging indicators confirm long-term trends, but they do not predict them.

Examples of lagging indicators:

•    Average duration of unemployment

•    Balance of Trade

•    Gross Domestic Product (GDP)

•    Productivity Report

•    Employee Cost Index (ECI)

•    Average Prime Rate

Coincident indicators

Coincident indicators change at approximately the same time as the whole economy, thereby providing information about the current state of the economy.

Examples of coincident indicators:

•    Industrial Production

•    Personal Income

•    Unemployment rate

•    Manufacturing and trade sales

•    Non-farm Payroll employment (US)

•    Retail Sales

•    Consumer Price Index (CPI)

 

5. How can I analyse the market myself before trading?

There are three basic types of market analysis:

  1. Fundamental Analysis
  2. Technical Analysis
  3. Sentiment Analysis

Fundamental Analysis

Fundamental analysis is a way of looking at the market by analysing economic, social, and political forces that may affect the supply and demand of an underlying asset.

The fundamental analysis on Forex and Future market focuses on the overall state of the economy, and considers factors including interest rates, production, earnings, employment, GDP, housing, manufacturing and management.  For instance, a good economy usually leads to stronger currency value.

Technical Analysis

Technical analysis studies the price movement as people believe all market information is reflected in price. Technical analysis has been used by traders for many decades.

Common technical analysis involves analysing price chart patterns (e.g. head and shoulders or double top/bottom reversal patterns, bullish and bearish flags, pennants, etc.), studying technical indicators (e.g. support & resistance level, channels, trendlines, moving averages, RSI, Bollinger Bands, Fibonacci, etc.).

Sentiment Analysis

Market sentiment defines how people feel about the market. The sentiment analysis is based on the behavioral assumption that some signals will attract people to buy or sell the underlying asset, thereby resulting in rise or fall in the price.

Sentiment analysis attempts to quantify what percentage of market participants are bullish or bearish. Once the majority sentiment is identified, a sentiment analyst will often take up a position on the opposite side on the assumption that the crowd is wrong. e.g. Short at points of extreme optimism and Long at points of extreme pessimism