Making More Money with Less, Online Trading Options on Margin
Margin accounts enable investors to use a small amount of money to deal in larger volumes. Using a margin account means that a trader essentially borrows funds to further increase the possibility of a higher return on investment. Margin accounts are used by investors with the leverage provided by the borrowed money; this is to make larger trading positions possible. These margin accounts are also used by currency traders dealing in the Forex market.
Simply put, trading on margin means an investor is trading using short-term borrowed capital.
By using a margin account, investors can arrange deals, as well as trade large amounts by using a small amount of capital. For example, if he wants to invest in positions amounting to $10,000 or even $100,000, he can do so using funds as little as $50 or $100.
Starting Margin Accounts
If an investor is interested in trading using a margin account, then he must sign up first with a regular broker, or he can use an online Forex discount broker. After choosing the broker he’ll be dealing with, that’s when the margin account will be set up.
Before the trading process, money should first be deposited into the margin account. The amount will depend on the percentage agreed upon by the broker and the investor. The percentage will usually be around 1 or 2% if the currency units are about 100,000 or more. If the investor deposits 1% for trading, then the remaining 99% will be provided by the broker.
The investor will not be charged interest on his borrowed amount, but if he does not close the position before the agreed delivery date, then the amount will be rolled over, and that’s when interest will be charged, depending on his position.
Brokers of margin accounts use $1000 as security. If the investor he’s dealing with starts to face losses that reach $1000, the broker may initiate margin calls. The broker would either ask the investor to put more money into his account, or just to close the position completely to limit further losses. Some brokers tend to liquidate positions once a margin call is reached.
Risks = Forex
Using margin accounts will help you deal in larger amounts that your capital usually cannot support. Be sure to check all the conditions that come along with margin accounts; seek additional advice if needed. Forex carries a high degree of risk; however, profit will not be made if you’re not ready to deal with that risk.
One of the greatest threats to your ability to succeed in forex trading is your emotions. No forex trader can entirely control worry, fear, and greed – and each of these is liable to lead you into error when you are making a trade. For some traders, the solution is automated forex trading: A computer program that operates your forex trading strategy, or one that is recommended, without being influenced by emotions. It takes into account the elements of a strategy that determine when to trade, how much to place on a given trade, and when to exit, among others. The elements of an automated forex trading strategy can be based on reasonably basic operations, for example, like following a Fibonacci retracement, or they can comprise a complex and sophisticated strategy with many elements. You can choose the strategy you prefer, or let the experts provide one for you, but you must accept the conditions that come with getting a machine to do the job. This means that the strategy will be executed exactly as planned regardless of any change in conditions, the market, etc. There are automated forex trading systems that make use of the programming language on professional platforms like MetaTrader 4 and MetaTrader 5. Others run separately on a computer and connect up to automated forex trading platforms. Some automated forex trading platforms have strategy building ‘wizards’ that permit traders to build a strategy from a list of indicators. This allows a non-specialist to enter in each element of a strategy separately, but then the program will trade according to all the desired criteria – i.e., you input trading entry when a moving average is crossed, or when a given stochastic move to a specific position. Forex Robots It is also possible to work with a forex broker who provides an algorithm that implements a very sophisticated trading strategy – these are sometimes called forex robots. The programmed applications of the forex robot include ways of managing a trade while it is in progress. The robot will place stop losses and profit-taking strategically, insert trailing stops or even implement a scaling strategy. From a mathematical point of view, the robot can do everything to make your trade succeed – unfortunately, trading is not a mathematically determined science, and so success by these robots is limited. This takes the burden of trading off the individual but means that you will only earn as much as the algorithm is capable of. The average return from such algorithms is six to eight percent per month – if you find one that promises more, by all means, test it out! What these programs are very good at is cutting losses – they will keep you from bad trades or trades in which some element of strategy is neglected. There are, of course, some dangers to be aware of in using forex robots. Like all computer applications, forex robots often have bugs that the software maker hasn’t ironed out yet. A bug can undermine the effectiveness of the forex robot, or break it down in the middle of trading. Then, forex robots, like all computer programs, are vulnerable to hackers if they do not operate in an environment of perfect security. Forex trading on a platform is very safe, but when you move it to another computer or data provider, you need to ensure that the correct protection is in place. Then there is a less obvious danger: Limited application to market conditions. You may choose a forex robot for a specific strategy, but the market is always changing, and that strategy may just not apply after a certain period. You can move to a new one, of course, but you should be aware that robots are inflexible and have a limited shelf-life without recalibration. Backtesting is the way to decide if a forex robot will work for you. You input conditions from a specific period in the market in the past – so that you know exactly what the outcome of trades will be – and then you see if the robot follows the logic and makes winning trades. But even with backtesting, it is challenging to tell how well a given robot will succeed in real conditions. Vendors will show you all sorts of records of success, but there’s no way to know if they’re real. The only way to find out is to try the robot out, and see what happens. There’s a great deal of curve-fitting or adjustment in the selling and presentation of forex robots that are ready-made for use. No machine can win all the time in forex trading, nor can any human being succeed 100 percent of the time, no matter how great a genius the trader is. The market is not always rational and is affected by too many factors to always provide happy results. What you want from a forex robot is a reasonably consistent level of success. A human being who is a good forex trader can earn more than these machines on a regular basis. Consider what will work best for you, and what your goals are as a trader, before going the forex robot route.
So you have decided to “hire” a forex robot to do the trading in your behalf. However, the problem is, how are you going to deploy it exactly? If you are clueless about it, here is an easy step-by-step guide on how the deployment procedure works. Of course, there are various methods you can choose in setting up your Forex system. One is the option of running the software on your personal computer, which will need you to leave your PC on for 24 hours each day, connected to the Internet. Or, you may choose to set up your robot in a Virtual Private Server or VPS, where it will work nonstop even when your PC is already off. Running a Forex robot on your computer. The software used for Foreign exchange trading can be pretty intricate and complicated. Many components may need to be installed first before you can eventually start trading. In order to save you some trouble downloading and installing the programs yourself, you may opt to choose hiring a website which offers robot installation for a nominal charge. By using a piece of software and a secure connection like LogMeIn, a technician will connect to your computer, and set up your system for Forex trading in your behalf. Once it’s done, you’re good to go.Running a Forex robot on a VPS. The websites that offer to install robot in others’ behalf may also offer the option of getting your robot set up from a VPS. First, you will have to acquire a VPS. Then, you have to provide the technician with the details of your VPS. He or she will configure your robot with your chosen VPS. After doing so, you can start and stop your robot whenever you want to. You can make it work even when your pc is off. You can also alter its technical parameters and set it up with a new set of working criteria. It’s all yours to do.
The market sentiment seems to flip flop back and forth on a daily basis between a “Risk On” and a “Risk Off”. Reading Risk Sentiment is as simple as following the direction of the US Stock Market.Each day, it seems a new rumor is produced and the stock markets shifts accordingly. The seesaw action can take a toll on a trader’s emotions.One way to gauge an underlying trend in the market is through the risk appetite of investors. The benefit of understanding the mood of the market is it allows you to align your trades in the direction of the market sentiment.When you see the stock market increase significantly, that is an indication that risk is “on”. A risk “on” environment is a mood of the market where investors feel good about the future prospects of the economy. Therefore, they take their capital and speculate in the stock market and high yielding instruments. This generally increases the value of the stock market and high yielding currencies which lately are the Australian Dollars (AUD) and New Zealand Dollars (NZD).At the same time, low yielding instruments tend to gain less on a relative basis or possibly even lose value. Low yielding currencies tend to be sold to fund the purchase of a higher yielding currency. This selling of a low yielding currency while simultaneously buying a high yielding currency is called the Carry Trade. So an effect of a risk “on” sentiment is an increase in the stock market and demand for high yielding currencies. As a result the Carry Trade strategy tends to perform well. (See additional resources below for more information on the Carry Trade Strategy.) In the chart above, since the AUD has historically been a high yielding currency, when the risk sentiment was ‘ON’ (Green shaded areas) the AUD/USD exchange rate was likely to rise and the carry trade strategy worked well. When the risk sentiment turned ‘OFF’ (pink shaded areas) the AUD/USD exchange rate tended to fall and the carry trade strategy would not have performed inconsistently.When you see the stock market fall like we did earlier this week that is labeled as risk “off” in the media. That means investors and traders are averse to risk…they want to avoid risk and risky instruments. Therefore, the investors pull their money out of stocks by selling their shares and sell their risky instruments like high yielding currencies. In a risk “off” market mood, the carry trade does not work. Although a trader is gaining a daily dividend, the movement of the exchange rates is so adverse that is wipes out any interest gains.In a risk “off” environment, traders are better served buying safe haven currencies like the US Dollar (USD) or Japanese Yen (JPY). (Until August 2011, the Swiss Franc was also considered a safe haven currency, but the recent intervention by the Swiss National Bank is trying to curtail the buying of the Franc.)The risk assets like the US Stock market and high yielding currencies like the AUD are near resistance levels. This may mean a return to risk aversion and a selloff in the stock market and AUD/USD.