Forex Trading: Margin Usage and Introduction to Hedging

A good rule of thumb for either a mini-account or standard forex account, is to limit your margin usage for each trade to 5% - 10% of your usable margin.

As an example, if your usable margin is $5000, to trade safely, limit your margin usage for each trade to a maximum of $250. This means trading only 1 full lot for each trade. This is assuming that you are trading in a CMS Universal account with 400:1 margin. Your use of margin is increased with a smaller ratio, as most other brokerages only offer a smaller ratio, normally 200:1 or even 100:1.

As your account grows and your usable margin grows, you can increase your margin usage and trade bigger mini or full lot sizes. If you lose money and your account shrinks, drop your margin usage back down to smaller sizes. You need to learn to keep your eye on your usable margin, especially if you've suffered some losses.

Protect your usable Margin by not having more than 2 open hedged or unhedged position at any one time. Your usable margin & equity will get eaten up by un-hedged open positions that go bad in the wrong direction...this is a really good reason why you want to use stops, and if
you hedge, hedge tightly.

IMPORTANT: Don't just keep putting on positions because you think it's a good opportunity. First sell a position and book some usable margin before you put on another position.

NOTE: Hedging does not use up more margin! Use it to protect your equity & usable margin, esp. in an emergency situation!

If you break the hedging rules, and your positions go against you and you aren't properly hedged with stop losses, you'll quickly see your usable margin degrade.
If it degrades enough so that your usable margin goes into the negative, you'll get a margin call. This means that the operators will automatically start selling some of your lots in your oldest losing positions in order to beef up your usable margin. This makes your unrealized loss become a realized loss...and the money is gone from your account.

If you lose too much useable margin, they won't even let you trade in your account, the message they'll give you when you try to put on a new trade is, 'Account in Untradeable Condition'.

If this happens, you might have an open position that needs to be hedged immediately or you might need to sell an old position. Or you might need to deposit more money into your account. Then you can start trading smaller lots to win back some usable margin.

You can lose your entire account balance if you're not careful. One other good thing about forex trading is that you will never lose more money than is in your account, you won't have to sell your house if you get a margin call! Stick to the rules above and this won't happen to you. You'll make more money than you thought possible and without the stress of loss.

About the Author

Cynthia Macy is co-author of 'The Day Trade Forex System: The Ultimate Step-By-Step Guide To Online Currency Trading'.
http://www.daytrade-forex.com
http://www.successtrading2000.com http://www.professionalforextradingonline.info
http://www.shorterminvestingsite.com

FOREX Trading Strategies

FOREX Trading Strategies

To be a successful FOREX trader you need to develop and adhere to a trading strategy. There are many different strategy's available and no particular one is good for all traders; rather, each trader needs to develop his or her individual approach to the FOREX. We each have special skills that separate us from others and the FOREX trader needs to find what works best for him/her. Some traders rely solely on technical analysis while others prefer fundamental analysis, but many successful FOREX traders use a combination of both to get a broad overview of the market and for plotting entry and exit points.

Technical analysis, or charting, relies on one key concept: Prices move by trends. The common saying in FOREX and stock trading is 'The trend is your friend.' If prices are moving in one direction, the strength of the move can be observed by looking at the chart. Market movements have identifiable patterns that have been studied for many years and a thorough understanding of these trends and how to use the trends to make FOREX trading decisions form the basis of a good trading strategy.

There are many analytical tools available to study market movements. FOREX traders can use computer software or even pen and paper to perform their own analysis. Books abound describing many of these strategies. The beginner FOREX trader should study each one well and acquire a working knowledge of the concepts. Study each method until it is mastered, then use itthe strategy to fully learn it. Once mastered, move on to the next strategy and repeat. It is a simple practice to "trade" FOREX simply on paper, without entering any actual trades. In fact, this method is highly recommended until the beginning FOREX trader builds some confidence.

Support and resistance levels are used in many FOREX trading strategies. 'Support' refers to the price level that is repeatedly seen as the bottom - when the price reaches this level it tends to rise. Prices will seldom fall below the "support" line. At the opposite spectrum is the Resistance levels. Resistance appears to be the peak that a price will reach when buyers and sellers seem to agree. At this apex prices will move up no further. The space in between "resistance" and "support" is known as the "trading range". Prices can move back and forth within this range for some time. The longer the time frame spent in this range, the more important the signal triggered when prices move outside of the range.

When currency prices break through either support or resistance levels, the prices are expected to continue in that same direction. As mentioned, the longer prices stayed in a trading range, the more significant the "breakout", if prices move above "resistance" or "breakdown", if prices fall below "support" For example, if the price rises above the previous resistance level, it is seen as bullish - the price should continue to rise. This signify's that more buyers have entered the market and this increased "buy" pressure will move prices higher. Conversely, when sellers are too many and buyers few, a "breakdown" could signify prices moving lower again until buyers and sellers once again reach equqlibrium.

To find support and resistance levels, price charts need to be analyzed for unbroken support and resistance levels. Charts can be analyzed in any time frame; short term traders will study daily or even hourly charts while the long term trader will use weekly or monthly charts to easily see the long term trend. Traders can use support/resistance levels to determine when to enter or exit a transaction.

Moving averages are another common tool in FOREX trading strategies. If a trader only uses the closing price of a currency at the end of the day as a guide, it is hard to establish the true direction of the move. Moving averages "smooth" out the large moves and give us a much clearer look at the currency price. One average used is the simple moving average (SMA) shows the average price in a given period of time over a specified period of time. A 10 day SMA simply takes the past 10 day closing price of a currency and averages out the 10 day data. Another popular moving average is a weighted moving average. While similiar to the SMA, the WMA puts more emphasis on the last several days trading. So while still showing a 10 day average, more weight is added to the last couple of trading days to better reflect the true trend. When prices are above the MA, they will tend to stay above the MA line. When the MA is below the line, price decline can be expected as well.

These are examples of trading strategies that can be used individually or in combination. In practice, the FOREX trader should have a repertoire of trading tools to examine market conditions and to support the findings of one trading method or another. Experienced traders will rely on several, rather than one, key indicators to base their trading decisions on.

Similarly, fundamental analysis can be used to reinforce technical findings, or vice versa. The FOREX trader will study currency valuations, inflation rates, and other key financial indicators to decide whether a currency is "cheap" or "expensive" Ideally, the FOREX trader will use several indicators into account when plotting a trading strategy.

Every trading strategy should provide clear guidelines about when to enter a trade, what to expect in terms of market movement, when to exit a trade, and how much loss can be accepted in case the deal moves against the trader. Following these simple guidelines and learning about technical analysis can help you become a successful FOREX trader.