Orders and directives in the Forex market

Stop-loss order

The meaning of this order is just as its name implies. The order cuts off our transaction at an exchange rate that was predetermined, or rather, it limits our loss, if there is one, to an amount which is known and determined in advance.

For example, if we bought Euros at a particular exchange rate and we placed a stop-loss order of 100 pips below the exchange rate of purchase, we know that for this transaction we can only lose 100 pips.

The advantages are:

This order obliges us to make an orderly and timely plan for our position and to manage risks in advance.

It prevents large losses and limits our loss to a maximal sum which is known in advance.

It prevents the intervention of emotions, “Hunch”which may affect our decisions. The order is put into action in a computerized and fixed manner.

It prevents the need to constantly follow our position.

Stop-loss makes the Forex market the most secure market in the world

 Let's assume that the exchange rate is 1.5220 and you think that the rate will rise to 1.5320. If you want to gain 1000 USD through a transaction of 100,000 Euros, but are not prepared to take a risk of more than 200 USD, what will you do? Pick up the phone and call the broker, and request to “buy me 100,000 Euros, and place a stop-loss order at an exchange rate of 1.5200, 20 pips below the entry rate”.

In other words, if the exchange rate rises, great – we have gained. If the exchange rate falls and reaches 1.5200, the transaction will be closed at the moment the exchange rate reaches a rate determined by the order and our loss will only be 200 USD.

Thanks to the stop-loss order we have placed we can rest easy and not lose more than what we allowed ourselves to lose. There is no channel of investment in which you can set your risk with absolute certainty.

These two orders do not entail any payment of commission: They can be placed at the beginning of the transaction, be changed in the course of the exchange, be moved or removed, as long as they haven't been executed. It is important to note that there are brokers who allow you to place the order only after the transaction has been opened. On the other hand, there are brokers who allow you to place these orders at the beginning of the transaction, it is all subject to the firm policies.


Future order - limit

Limit order – is a trade order which allows a transaction to be performed at a better price than the current market price.

For example: Let's assume that the market price for the currency pair EUR/USD currently stands at 1.3500. The trader expects the Euro to rise up to 1.4000 in the long term, but in the short term the trader believes that the value of the Euro will decrease and is therefore not interested in buying the Euro at the current price of 1.3500, but rather wants to wait for a small decrease, until 1.3300 and then buy at a lower price.

The limit order will be executed only when the price falls to 1.3300 – in condition that the exchange rate reaches this value, of course.


Future order – stop

This order functions similarly to the limit order, but in the opposite direction.

Utilization of this order is relatively rare and a portion of the brokers do not offer this option at all.

For example: Let's assume that the market price for trading of the currency pair EUR/USD stands at 1.3500.

A purchase stop order would be set at above 1.3800. A sale stop order would be set at below 1.3200.

A trader can set a future stop order, which allows the trader, on the one hand, to enter the transaction in the direction of the market at the time when one of the limits is reached – 1.3800 or 1.3200, and on the other hand, provides the trader the privilege of performing the transaction when he/she is not in front of a computer screen.


One-Cancels-the-Other (OCO) order


An OCO order is a combination of the stop order and limit order for a future transaction.

The trading platform follows the market for the trader, and will execute stop and limit orders (but not both) at the moment in which the market arrives at a limit order or stop order, the order will be executed and the other order will be immediately cancelled.

The two orders are valid until they are cancelled in one of the following scenarios:

Good Till Cancel – the trade order is valid until it is cancelled by the trader, who executes the cancellation through anorder on an internet tradingprogramor through a telephone conversation with the broker.

Good Till Date – the trade order is valid until the date that is set by the trader. In other words: if by a certain date a trade order was not executed, it automatically gets cancelled by the broker or by the trading program.

Breakaway gap

In situations where there is a gap in the price or the areas in the graph in which there was no trading, most brokers cannot undertake to execute orders. In the case in which a client set an order and there was a breakaway gap, the broker will try to remove the trader from the transaction at the best available price.



There are brokers who promise their clients realization of orders at a promised exchange rate under any market condition.


Difference in interest rate between currencies – Rollover


Before we discuss this subject it is necessary to note that most brokers perform a rollover in an automatic manner and that there is no need for intervention by the trader. In order to understand the meaning of the rollover one must know that the interest rate between countries is not identical and that they are determined by the local government from time to time, as part of the monetary policy.

Rollover interest is the interest paid or receivedforholdingapositionovernight. Every currency has its own interest rate and because Forex trade is conducted in currency pairs, every transaction contains not just two currencies but also their interest rates. If the interest of the currency which you have bought is higher than the interest rate of the currency you have sold, you receive the rollover interest (positive rollover). If the interest rate of the currency you have bought is lower than that of the currency you have sold, you will pay the rollover interest (negative rollover). Rollover interest can add significant costs or profits to your trade.

Example: When you buy the EUR/USD pair, you buy the Euro and sell the USD in order to pay for it. The interest in the Euro block is 1% and the interest rate in the Unites States is 1.5%. Since in this case you bought the currency with the lower interest rate, you will pay the rollover interest – 0.50% on an annual basis. Conversely, if you sell the EUR/USD currency pair, you will pay the interest on the Euro and you will gain the interest on the USD, and you will receive a rollover interest of 0.5%.

The mathematical formula is: 0.5%fromthedifference in the interest rates between the countries, dividedby 365days,multiplied by the transaction amount.


Delays in execution or lack of execution of transactions

Such delays occur in the following cases: When economical data is publicized, and there are problems in your internet connection or when there is overloading of servers at the brokerage or the bank. Information that arrives at a delay of tenths of a second can be rejected.

If you thought that the inter-bank system was perfect, think again. The inter-bank systems can also present a “re-quote” message, bank systems can also experience rejection of transactions or partial execution of an order.

Leverage

What changes the whole picture, and turns the Forex market into a market of opportunities to profit a lot of money in a short span of time, is leverage. But…of course, leverage causes trading to become more risky.

So what is leverage?

Brokers allow you to perform transactions in sums of money which are much larger than the amounts that you have in your account. Sometimes even up to 400 times more than what you have invested.

For example: You have deposited 1000 USD, the exchange rate of the Euro against the USD is 1.5220. And you believe that the price of the Euro is about to rise by 100 pips. That is your opinion.

You can pick up the phone and call the broker or give an order via the computer, 24 hours a day “please buy me 100,000 Euros”

Despite the fact that you have deposited 1000 USD and 100,000 Euros cost 152,000 USD, in this case you have taken advantage of a leverage of 152 times the money which you have in your account.

In a transaction of 100,000 Euros, how much is each pip worth. We learned it already, remember? 10 USD. Let's assume that the exchange rate indeed rose to 1.5320. How many pips have you earned? 100. And how much money have you earned? 100*10 = 1000 USD.

Let's deduct the commission, and the net profit from the transaction will be 970 USD. Nearly a 100% return in one day.

How great!

But…what will happen if the exchange rate falls to 1.5120?

You have lost 100 pips, you have lost all of your 1000 USD.


The Multiplier Effect of Leverage in Forex

Think of forex leverage as a multiplier. The smallest changes in the prices of currency prices would be magnified when applied to your trading account. The usual forex leverage for forex accounts nowadays is a 1:100 leverage. This simply means that for any single dollar that an investors puts out for trade, his forex broker multiplies that amount by 100. And that multiplied amount becomes the basis for any changes in the currency price of the investor’s traded pair.

It is like being able to borrow money which is 100 times the amount of what you put out. Comparing it to a mortgage, it’s like being able to buy a house with only a 1% downpayment, and the rest is taken care of by your bank. Should the house appreciate in value, and you decide to sell it, you get the whole profit from the sale. Of course, after the sale you would have to pay back the amount that you loaned from the bank with interest charges, depending on how long you hold on to the property using the loaned amount.

In the example above, it is very much possible that your profit is greater than the amount that you initially put out. The same is true with forex trading. The profit that you can gain for any single forex trade can be greater than the actual money that you exposed for that trade position.

But, on the other side of the coin, any forex trader should be prepared for the possibility that a trade can go against his position – meaning, a loss is always possible as no one really knows how the forex markets would move.

So, using the same explanation, it is also very much possible that a forex investors loss, should the market go against his trade position, is greater than the amount that the investor exposed in his trade. Since the traded equity is multiplied 100 times (or whatever the forex leverage is with his forex broker), the profits or losses, just the same, are also multiplied 100 times.

That is where forex leverage becomes a double-edged sword. It is a double-edged sword because it can help you conquer the forex markets and profit from it. Or it can also be destructive for a forex investor with wrong positions taken with his trades, and slice down his account into smaller pieces.


Use Forex Leverage to Your Advantage

Knowing that forex leverage is a double-edged sword, proper safeguards must be observed by forex investors to tame the effects of forex leverage. And this can be done with proper capital management and strict trading discipline.

Knowing that forex leverage shall multiply the amount of equity he exposes, a wise forex investor should always compute according to this multiplied value in mind, and how price changes would affect the totality of his equity. Being conservative with the management of risks can protect a forex trader from unnecessary losses.

Although forex leverage is a double-edged sword it does not mean that it shall always be harmful for the forex investor. In the first place, it is forex leverage which lured many forex traders into investing in currency trading in the first place. Just know how to use forex leverage to your advantage, and always compute how much effect forex leverage can have into your trading account to prevent massive losses which can excessively reduce your account equity. Control forex leverage with proper capital management and you will be on your way to a correctly managed forex investment.


Should you leverage?

Later on you will learn whether it is worthwhile to leverage your transactions and by how much. But one must always remember, for whoever wants to leverage – the option is always available, but it's risky.

When there is a leverage of 300 times you can perform a transaction of 300,000 Euros as well, and if the price rose by 100 pips, you can even earn a 300% return in one day. But if the exchange rate decreases by 33 pips, you have lost your whole investment.

Why do the firms allow us to leverage?

The answer is simple: It is preferable for them that we perform a transaction of one million Euros rather than a transaction of 10,000 Euros, in this way the broker earns a commission of 300 USD and not 3 USD.

Later on you will learn what your interest is as traders, and why you shouldn't be tempted to leverage transactions.

Transaction / Position

 In order to complete a transaction we need to perform a purchase and a sale. If a purchase and a sale were not performed, then the transaction was not completed, and it doesn't matter if you are going to gain or lose in the course of the transaction.

Remember, this is an important rule: realization of the gain or loss occurs only when the transaction is complete. 

Position is in essence a transaction.

Opening of the position - opening of a transaction for a currency pair.

Open position –a position which hasn't yet been closed, in other words, the transaction has not yet been completed.

Closed position –a transaction which has been completed, the actions of purchase and sale have been performed.

Trading rules

If you trade a certain product, and you think that its price will rise, you will buy it and if its price indeed rises, you will profit when you sell it, and if you are wrong and its price goes down, you will lose. For example, if you trade wood, and you think the wood price will rise, you buy 10 tons of wood when the wood price is 100 USD per ton. And later you sell it when the price rises to 150 USD per ton, you have profited 500 USD. If you thought that the wood price would decrease, you would wait until the price reached 50 USD per ton, and then you would have bought the same 10 tons at only 500 USD.

The rules are: 

A trader who thinks the value of his product is going to rise, buys more goods and waits for the price to rise in order to sell. A trader who thinks that the value of a product is going to fall, rushes to sell the goods and make the most of his money. Traders do not always have to lose everything or gain everything, the trade can be stopped in the middle, and such a situation will be expanded upon further later. Let's translate this into terms of Forex market: If you expect the exchange rate of a currency to rise, you will buy it. If you expect the exchange rate of a currency to drop you will sell it. The sum which you profit or lose depends on the volume of the transaction which you perform. The greater the transaction is, the more you can profit, but you will take on a greater risk and the smaller the transaction is, the smaller the profit will be but you will have taken on a smaller risk. Trading currencies is exactly like buying and selling wood, tomatoes or cucumbers. We buy the goods when we think the price will rise, and we sell the goods when we think the price will fall.

Elementary concepts of the Forex Market

Currency pairs , buying and selling rates

In foreign currency trading there are always currency pairs – the base currency and the counter currency. The base currency – it is in essence our product, it is denoted on the left side of the pair. We always buy or sell the base currency. The counter currency – it is the means of payment and is denoted on the right side of the pair. In a transaction involving the EUR/USD I buy or sell the Euro against the USD wherein the means of my payment is the USD.

The exchange rate is the price of one unit of the base currency in terms of the counter currency. Let's take a look at the Euro against the USD: One Euro is equal to 1.5220 USD.

Spread

Spread is the difference between the buying price and selling price and is the commission which you pay, as currency traders. For example: If, for instance, you want to convert USD to Euros at the bank. They will tell you that the buying price is 1.56 and that the selling price is 1.49. In other words, in order to buy one Euro you would have to pay a little more than one and a half USD. If in that very moment you would want to sell your one Euro to the bank, the bank will buy one Euro at a price slightly lower than one and a half USD, so if you sold 1000 USD to the bank you received 641 Euros. By selling the Euros back you will get only 955 USD. You paid 1000 USD and received 955 USD, so where are the other 45 USD? This is the profit of the CHANGE store – this is the commission they charge from their customers. This is the only commission that you will pay; in the Forex market there are no additional commissions.

NOTE: It is implied by such that we will always lose because of the spread in the first second after the trade.

Pips

Another important concept in the Forex market is “pips” – pip (singular), pips (plural) In the Forex market the exchange rate rises by pips and falls by pips. For most of the currencies, the pips are denoted 4 places after the decimal point. In other words, if the EUR/USD rate is 1.5220 then the number of the pip is 0. If the exchange rate was previously 1.5220 and now it rose by one pip, the exchange rate will be 1.5221. If the exchange rate fell by 10 pips, it would be 1.5210 and so on. The Japanese Yen is different: For the Japanese Yen the pip is denoted at two places after the decimal point, meaning that, if the USD/JPY is at 88.57, then the pip is equal to 7. if the exchange rate rises by 3 pips it would be equal to 88.60 and if it decreases by 27 pips the exchange rate would be 88.30.


Average daily fluctuation 

To become acquainted with the concept, the average daily fluctuation of the EUR/USD is about 100 pips a day. On more turbulent days the fluctuation reaches 200-300 pips, on calmer days the fluctuation reaches 50-60 pips. And in terms of percentage? If the exchange rate is currently 1.5220 and I want to announce tomorrow that it rose by one percent, it would be represented by a rise of 152 pips. So if we said that the daily fluctuation of the EUR/USD is about 100 pips a day, by what percent does the EUR/USD fluctuate on average? About 0.7%-0.8%. and in more turbulent periods – 2% at most. Fromthiswecan learnof anewand important advantage that exists in the Forex market – this market is stable, and I'm referring mainly to the major currencies: Euro, USD, Pound, Yen and Swiss Franc. This is a stable market, with exchange rate fluctuations of half a percent up to one and a half percent throughout the day. There is no possibility that you will trade a currency and lose 10%-15% in one day.


Value of pips

Let's now learn the value of every pipwithin the confines of a particular transaction. If the exchange rate of the EUR/USD is 1.5220 and you want to buy 100,000 Euros, how many USD do you have to pay? 152,200 USD, of course. A second passes and the exchange rate rises to 1.5221. By howmany pips did the exchange rate rise? By one pip. And what is the current value of the 100,000 Euros? 152,210 USD. Which is 10 USD more. The value of one pip in a transaction of 10,000 Euros is one USD. In other words: In a transaction of 100,000 Euros, each pip has a value of 10 USD. And in a transaction of one million Euros – 100 USD.


How are pips calculated?


We take the amount of the transaction that we have performed in terms of the base currency and divide by 10,000 – this is the value of one pip in terms of the counter currency.

For example: For a transaction of 100,000 Euros we divide by 10,000, and we get 10. This means that the value of every pip is $10. If we execute a transaction of 30,000 Euros, every pip worth is 3 USD. For the Japanese Yen the calculation is slightly different. We divide the amount of the transaction in terms of the base currency by 100 and that is the value of the pip.

For example: A transaction of 100,000 USD in the currency pair USD/JPY, we divide by 100 and the result is 1,000 Yen. Assuming that the exchange rate is 88.00, we divide the 1,000 by 88, meaning, 11.36 USD per pip.

Example: We will take the currency pair of EUR/GBP and a transaction of 100,000 Euros, each pip is worth 100,000 divided by 10,000 and is therefore worth 10 USD. And in what currency are we paying in? In Pounds. Meaning that every pip is equal to 10 Pounds.


Size of the spreads

Do you know what the accepted ask/bid spread is for the EUR/USD exchange rate? 3 pips. So in order to perform a transaction of 100,000 Euros, which is equal to 152,000 USD how much commission must one pay?

If every pip is equal to 10 USD in a transaction of 100,000 Euros, and the spread is 3 pips, we will pay 30 USD in commission – a onetime payment which includes the purchase and the sale.

Commissions If to compare the commissions rate paid in the stocks market we will notice that in the Forex market the commissions rate are very low.

For example, in a 10,000 Euro trade the stock's commission is half a percent hence 50 Euro. In Forex however you will pay only 3 USD commission for a 10,000 Euro trade, for a 100,000 Euro trade you will pay only 30 USD commission and so on and so forth.

Harami Pattern

Harami (makna "hamil" dalam bahasa Jepun) Corak Candlestick adalah Corak pembalikan.
Corak mengandungi dua candlestick:

Yang lebih besar Candle menaik atau menurun (Hari 1)
Kecil Candle menaik atau menurun (Hari 2)

Corak Harami dianggap sama ada yakin atau menurun berdasarkan kriteria di bawah: Bearish (menurun) Harami: Harami menurun berlaku apabila ada lilin besar bulis hijau pada 1 Hari diikuti oleh lilin kecil yang lembap atau yakin pada 2 hari pertama. Aspek yang paling penting Harami menurun adalah bahawa harga jarang turun pada 2 hari pertama dan tidak dapat bergerak lebih tinggi kembali ke penutupan 1 Hari. Ini adalah tanda bahawa ketidakpastian memasuki pasaran.

Bullish (menaik) Harami: Harami bulis berlaku apabila ada lilin besar menurun merah pada 1 Hari diikuti oleh lilin kecil yang bearis atau yakin pada 2 hari pertama. Sekali lagi, aspek yang paling penting Harami yakin bahawa harga yang jarang pada 2 Hari dan harga telah diadakan dan tidak berupaya untuk bergerak perlahan kembali ke penutupan lemah 1 Hari.

Carta di bawah menunjukkan satu contoh yang mendadak dan corak menurun Harami candlestick: