HARNESS THE POWER OF LEVERAGE

HARNESS THE POWER OF LEVERAGE
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-
6 FOREX CONQUERED
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.