The forex market allows traders to control massive amounts of leverage with minimal margin requirements; some firms offer as much as 100-to-1 leverage. For example, traders can control a $100,000 position with $1,000, or 1 percent.
Obviously, leverage can be a powerful tool for currency traders. While it does contribute to the risk of a given position, leverage is necessary in the forex market because the average daily move of a major currency is about 1 percent, while a stock typically sees much more substantial moves in excess of 10 percent. When trading in the forex arena, the use of leverage is pretty much considered similar to an interest-free loan from your broker. It enables a trader to use as much as 200-to-1 leverage. This translates to having $500 in margin while controlling a $100,000 position in the market, or 0.5 percent of the position value. This is considerable leverage that can work in favor of as well as against an online forex trader. Once again, leverage can be seen as a free short-term credit allowance, just as it is in the futures markets, allowing traders to purchase an amount of currency exceeding that of their account balance. As a result, traders are exposed to an increased level of both risk and opportunity. Due to the nature of the leverage in the forex markets, positions are normally short-lived. For this reason, entry and exit points are crucial for success and must be based on various technical analysis tools. While fundamental analysis focuses on what should happen, technical analysis is based on what has or is happening at the current time.
Identifying the overall trend, whether it is short term or long term, is the most elementary element of trading with technical analysis. A weekly or monthly chart should be used to identify a longer-term trend, while a daily or intraday chart must be used for examining the shorter-term trend. After determining the direction of the market, it is important to identify the time horizon of potential trades and to apply those strategies to the appropriate trend. Therefore, the techniques covered in this book are highly effective in trading the FX markets. Technical analysis techniques will be your "bread and butter"; they will help you master and generate profits in the forex market.
Technical analysis is the study of historical prices in an attempt to predict future price movements. There are two basic components on which technical analysis is based: (1) prices and (2) volume. With the proper un derstanding of how these two components exploit the impact of supply and demand in the marketplace, combined with a stronger understanding of how indicators work, especially when combining candle charts and pivot analysis, you will soon discover a powerful trading method to incorporate in the forex market.
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