Forex Minis Shrink Risk Exposure

Trading currencies means buying one country's currency while simultaneously selling another country's currency. Every currency trade therefore involves two currencies. The usual size of a currency pair is 100,000 units, known as a "standard lot."

In most cases, beginner traders do not want to stomach the risk that comes with the exposure of a standard lot. As a result, most online forex brokers offer the ability to trade mini lots, which are 10,000 units of the currency rather than 100,000. For a new trader, these mini lots can be an especially effective tool for learning to trade forex. (For background reading, see Getting Started In Forex.)

What is a Pip?
Before one can fully understand the benefits of a mini lot, it is important to review the concept of a pip. A pip is the smallest increment that a currency pair can move. For most currency pairs, a pip is a change in the fourth decimal place of the currency quote. For example, if EUR/USD is quoted at 1.5567 and it moves to 1.5568, it has increased by 1 pip. The value of 1 pip is calculated by the size of the lot that is traded. So, if you buy a standard lot of 100,000 EUR/USD at 1.5567 and it goes to 1.5568, a 1-pip move, then the value of your trade has increased by $10 (or 100,000 x 0.0001). (For more on this, see What is the value of one pip and why are they different between currency pairs?)

If we did the exact same calculation using a mini lot, then we would multiply the 1 pip by the size of a 10,000 mini lot instead of the usual 100,000 lot. So 10,000 x 0.0001 = $1. When you trade a standard lot, the value of the pip is $10, but when trading a mini lot the value of a pip is $1. This is true when the U.S. dollar is the second, or quoted, currency in the pair. (For more, see Common Questions About Currency Trading.)

Base Currency Vs. Quote Currency
One other piece of information to remember is that a currency pair is comprised of a base currency, which is the first currency listed in the pair, and the quote currency, which is the second currency listed in the pair. In the case of the EUR/USD, the euro is the base currency and the dollar is the quote currency.

The profit or loss is always expressed in terms of the quote currency. If the currency pair is the GBP/USD, then the base currency is the British pound and the quote currency is the U.S. dollar. For the USD/CAD, the base currency is the U.S. dollar and the quote currency is the Canadian dollar. Why the dollar is listed first in some instances but second in others is just a matter of convention. (For more insight, see the Forex Tutorial: Reading a Quote and Understanding The Jargon.)

The Value of a Pip
The last important point that should be noted before we talk about mini lots specifically is the value of a pip. Suppose you are trading the GBP/JPY; the British pound is the base currency and the Japanese yen is the quote currency. Now in this instance, we have an exception to the fourth decimal place rule for the size of a pip. In the case of the yen, 1 pip is measured in the second decimal place. The yen is the only exception. To calculate the value of the move, if we buy dollars against the yen and the dollar goes up from 103.45 to 103.46, then we have a 1-pip move. Multiplying by the standard lot of 100,000 x 0.01 = 1,000 yen. To bring this back to dollars, you would then divide the 1,000 yen by the dollar rate, let's say it's 103.46, which equals $9.66.

Why Trade Minis?
The real value of trading minis is in the versatility it provides in matching the trade size to an acceptable level of risk. For example, suppose you decide to take a long position in the USD/JPY. Let's assume that your entry point is 103.55 and that you've set your stop-loss order 15 pips away at 103.40. If you have $1,000 in your trading account, the maximum risk you should take in any trade is 3% of your trading capital. Because your capital is $1,000, 3% of your capital is $30. If you are stopped out of this trade and you are trading a mini lot, you will lose $15. But if you are prepared to risk $30, you can actually trade two mini lots and get the power and benefit of some leverage. If you were only trading standard lots, this trade would not be possible because a 15-pip loss, as per this example, would be $150, which is 15% of your $1,000 trading capital. Given a risk tolerance of 3% of the portfolio, this is too much risk for one trade. (For related reading, see Forex Leverage: A Double-Edged Sword.)

Mini lots allow a trader to adjust the amount of effective leverage used in each trade. With mini contracts, you can trade the equivalent of one standard lot by simply trading 10 minis. If you only want to trade a half of a standard lot, you can do so by buying five mini lots.

The Bottom Line
Mini lots provide flexibility that standard lots cannot offer. A mini lot is simply 10% of a standard lot and therefore, by trading in minis you can trade in fractions of a standard lot, anywhere from 1 mini to 10 minis. Mini lots are useful if the natural stop loss for your trade is farther away than the maximum risk you feel comfortable taking. You can simply reduce the risk by decreasing the number of minis until that number would equate to the stop-loss risk. Of course, if your market maker offers you 100:1 leverage, then for an account of $1,000, you can trade up to 10 minis at a time. The number of minis traded should be governed by how much you can lose if your trade goes wrong, which should not exceed 2-3% per trade.

Investing Blunders made in Forex

Whenever you decide to step into the Forex market by investing into this trading business, you should prepare yourself for entering into the market, somewhat blind.

This because you or anyone else, who is just stepping in, can not entirely know what position of the investing trend is currently going on, in which you are entering at.

Or, you might invest in the Forex market just before the market trend changes.

Smart and planned investments are the ones which protect your trading flow and help you put up a stop loss order on all your trades. And yes, this exit point of your trade has to be decided beforehand, that is before you enter the trade.
Once in the market or trade, you won’t have much time to think and last minute uncertainty can give room to blunders.

A stop loss order can plainly be defined as a trade exit point decided beforehand, which helps a trader in keeping a track of the right point at which to exit the position he is trading at.

A predefined exit point shields your investing plan for trading purposes by cutting your losses, and also guards against all your emotional or gut feelings which might tell you that you may get lucky with this deal or that.
Hence making you go ahead and bet in a deal without thinking much about your position and whether you will be able to bear its results if the market moves against you.

Another important fact about the history of investment blunders is that all the giant investing losses had once begun as a series of small losses. And this is exactly the reason why predefining a stop-loss order is so vital before you begin with a trade.

There is however a very common doubt which seems to be appearing in every trader’s mind while deciding the stop-loss order, “How wide should I set my stop?”
And although there are no standard answers to this doubt, it can still be cleared with some help.

Firstly, the width of your stop-loss order totally depends on the time frame for which you are planning to invest.

If investing short-term, you will have to set a stop loss order which is closely set to the currency price. But if you are investing long-term, you will have to give your currency price some more room to shift or move about and therefore, set your stop-loss order a little lesser.

Secondly, once it is clear to you what time structure you will be trading for, you are now required to eradicate the typical market disturbance in terms of instability, in that specific time structure.

Setting very tight or limited stop-loss orders can have some serious drawbacks to it, some of which are as follows:

• Firstly, setting tight stop-loss orders will actually minimize the consistency of your trading system because due to a tight order, you will get stopped out of the trade a little too often.

• Secondly, since your trading transaction costs add up for a key share of your company expenses, you considerably amplify your transaction costs.

Therefore, it is always advisable for the Forex traders to develop a trading system that is operational for a somewhat extended time structure.

With a smart and planned trading system employed, stop-loss limit set to minimize investing risk, and a well structured money management strategy in place, any trader can be well positioned to get the most out of their market trading and profits.

10 Things You Should Beware of During Currency Trading

1. Watch out of those who guarantee large profits.
2. Stay away from those who promise no financial free
3. Beware of those everything sounds very easy.
4. Don’t trade on Margin unless you have been trained
5. Please take cautious to online/phony transferring cash in online trading
6. Make sure its really interbank market
7. Job offer as Account Executive might lead you to use your money for currency trading
8. Need to ensure the company background
9. Avoid those company who won’t let you know their background
10. Don’t fully trust any agency or broker, put some effort to understand currency trading by yourself.

CAD High Reward to Risk Trade

Currently, there is a high reward / risk short USDCAD opportunity. The EURUSD remains in a range, but the recent rally is corrective. This corrective advance could very well be part of a larger corrective advance however.

Not much has changed regarding the EURUSD this morning. We wrote yesterday that "the drop from 1.5701 is in 5 waves and is most likely wave 3 within a 5 wave drop from 1.6039. A corrective 4th wave advance is expected to unfold over the next several days. 4th wave usually reach at least the 4th wave of one less degree (1.5083 in this case). The 38.2% of 3 is also a common terminal point for 4th waves (1.5153 in this case)." Although a larger correction to the mentioned levels is preferred, the advance from 1.4815 is clearly in 3 waves and therefore corrective; leaving the EURUSD vulnerable to additional weakness as long as price is below 1.4981.

Things are playing out as expected with the USDJPY. "Bigger picture, we maintain that wave Y (the third wave in a 3 wave advance from 95.72) is underway from 103.76 and will end in the 113.25-116.65 zone (Fibo levels from the 124.13-95.72 drop) and give way to a long term reversal. The rally from 103.76 is probably the first zigzag in a double zigzag (as wave Y), so expectations are for a drop to reach the 38.2% of 103.76-110.40 (107.86)." The USDJPY fell to 108.36 this morning but we favor additional weakness with the first objective being 107.86 and the second 107.10.
The GBPUSD has plunged and is nearing the longer term support levels that we have mentioned in recent months near 1.85. The short term trend remains bearish as long as price is below 1.9034. It is worth mentioning that 13 day rate of change is at its lowest level since August 1997. When we do get an upward correction, it will probably be sharp.

The USDCHF has nearly reached the initial objective (already) of 1.0986 (the 100% extension of .9647-1.0624/1.0010. A reaction lower is expected to occur off of this line. There is potential support near 1.0740.

The AUDUSD decline is nothing has continued and counting short term waves is an exercise in futility right now. The pair may test the January (and 2008) low of .8512 before we see a rebound. Longer term expectations are for the drop to reach .6770 but there will be corrections along the way. It is not safe to enter short at this level since the risk of a large and sharp correction are simply too high.

The NZDUSD spiked lower this morning, touching the 161.8% extension of .8215-.7536/.7921. Short term channel support should lead to a larger advance from near current price. Resistance begins at .7082.

Risks by the foreign exchange on Forex

The Forex is essentially risk-bearing. By the evaluation of the grade of a possible risk accounted should be the following kinds of it: exchange rate risk, interest rate risk, and credit risk, country risk.

Exchange rate risk. Exchange rate risk is the effect of the continuous shift in the worldwide market supply and demand balance on an outstanding foreign exchange position. For the period it is outstanding, the position will be subject to all the price changes. The most popular measures to cut losses short and ride profitable positions that losses should be kept within manageable limits are the position limit and the loss limit. By the position limitation a maximum amount of a certain currency a trader is allowed to carry at any single time during the regular trading hours is to be established. The loss limit is a measure designed to avoid unsustainable losses made by traders by means of stop-loss levels setting.

Interest rate risk. Interest rate risk refers to the profit and loss generated by fluctuations in the forward spreads, along with forward amount mismatches and maturity gaps among transactions in the foreign exchange book. This risk is pertinent to currency swaps, forward outright, futures, and options (See below). To minimize interest rate risk, one sets limits on the total size of mismatches. A common approach is to separate the mismatches, based on their maturity dates, into up to six months and past six months. All the transactions are entered in computerized systems in order to calculate the positions for all the dates of the delivery, gains and losses. Continuous analysis of the interest rate environment is necessary to forecast any changes that may impact on the outstanding gaps.

Credit risk. Credit risk refers to the possibility that an outstanding currency position may not be repaid as agreed, due to a voluntary or involuntary action by a counter party. In these cases, trading occurs on regulated exchanges, such as the clearinghouse of Chicago. The following forms of credit risk are known:

1. Replacement risk occurs when counterparties of the failed bank find their books are subjected to the danger not to get refunds from the bank, where appropriate accounts became unbalanced.
2. Settlement risk occurs because of the time zones on different continents. Consequently, currencies may be traded at the different price at different times during the trading day. Australian and New Zealand dollars are credited first, then Japanese yen, followed by the European currencies and ending with the U.S. dollar. Therefore, payment may be made to a party that will declare insolvency (or be declared insolvent) immediately after, but prior to executing its own payments.

Therefore in assessing the credit risk, end users must consider not only the market value of their currency portfolios, but also the potential exposure of these portfolios. The potential exposure may be determined through probability analysis over the time to maturity of the outstanding position. The computerized systems currently available are very useful in implementing credit risk policies. Credit lines are easily monitored. In addition, the matching systems introduced in foreign exchange since April 1993 are used by traders for credit policy implementation as well. Traders input the total line of credit for a specific counterparty. During the trading session, the line of credit is automatically adjusted. If the line is fully used, the system will prevent the trader from further dealing with that counterparty. After maturity, the credit line reverts to its original level.

Dictatorship risk. Dictatorship (sovereign) risk refers to the government's interference in the Forex activity. Although theoretically present in all foreign exchange instruments, currency futures are, for all practical purposes, excepted from country risk, because the major currency futures markets are located in the USA. Hence, traders have to realize that kind of the risk and be in state to account possible administrative restrictions.

Forex Risk Calculator Launched

In lots of counterfeit Forex trading software and tools, recently a really effective product Forex Risk Calculator has been released. It’s a powerful tool to determine the prospective risks before entering any positions.

The calculation of this factor doesn’t look too complicated, but if you want to do it by own then you will look that, there are a lot of computations, logic, and validation that had to be taken into concern. The Forex risk calculator tool speedily calculates where to put your stops based on the amount you are willing to risk on any specified trade. This calculator has all the option or functionality of the Excel FX Risk Calculator released from Alex Douglas. For a faster decision, before each trade, you must need to know exactly what your entrance price, end loss price, and target prices are. After giving all these input values, your account balance, and future position size, this calculator will compute your available influence, profit at target, pip profit, pip loss, and end loss. Moreover, it will compute the most significant values, the percentage of your account at risk and the percentage of reward.

So, this calculator will represent the amount of money you are going to put at risk when entering the market and it is extremely important. And this calculation will provide you useful indicator for creating your new position in the current market condition.

Forex - Risk Reward Ratio

Risk is one of the main key of success in the world of trading. Every trade bears a certain level of risk. Knowing the quantity of risk on your any kind of trade is one of the best way to limit it and to protect your extra loss. It is not possible to determine probably the certain amount of risk level in any kind of trading. But in the huge amount of up-down market of forex trading it is really needed to measure the risk level.

In forex trading, the best way to know your risk is to determine the risk-reward ratio. Measurement of forex risk reward ratio is one of the first steps you must know before joining into the forex trading. It is one of the most effective risk management tools used in trading.

How to Determine the Risk-Reward Ratio?

This ratio is calculated by dividing the amount of income the trader guess to have made when the position is closed by the amount he stands to drop if price moves in the unexpected direction.

To determine the amount of risk you need to determine the amount of money needed to enter the trade. And trader is hopeful to earn from the currency price is the reward level of that the movement. Here are a few examples of the risk-reward ratio:

If the risk is $400 and the reward is $800, then the risk-reward ratio is 400:800 or 1:2
If the risk is $1,200 and the reward is $600, then the risk-reward ratio is 1200:600 or 2:1

It is general concept for risk-reward ratio; you will get lots tools in the web for determining risk-reward ratio in more details with lots of effective features.