Knowing the ins and outs of the Foreign Exchange Market isn’t enough to be completely successful in your endeavors. You need to be familiar with the common tongue of that market, and what each Forex-specific term means in relation to your investments. One of the first things you should do when you decide to begin investing in this area is to become educated on everything from the rises and falls of previous years to current events in the financial world. Knowing the value of the U.S. dollar may seem important, but it doesn’t mean anything if you’re not sure what you’re doing with that information. Read on for a compilation of some definitions relating to this field, and learn a few tricks of the trade that you should get familiar with in order to be really successful:
Risk Taking and Risk Aversion
These may seem like easy enough concepts to grasp, and not particularly important to the overall outcome of your investment, but knowing whether you’re willing to take calculated risks with your money will come in handy when the time comes to make big decisions. Risk taking is pretty much exactly what it sounds like, it’s when people leave their investments in the market whether the future looks murky or bright, and hope for the best possible outcome. This can be risky, because you could lose the entirety of your financial input at the drop of a hat, especially if other participants are feeling flighty and not sticking to their initial investment as well. Risk aversion is when you would pull out of a more volatile market and put your finances into something safer for the time being. Investopedia.com writes:
Investors looking for “safer” investments will generally stick to index funds and government bonds, which generally have lower returns.
This eliminates the fear of diminishing the balance you’ve worked so hard for, and while you may not find it growing as fast in a less extreme environment, you’ll still be making money rather than losing it.
Drawdown
This is a measurement of the largest amount you could stand to lose on an investment if it should go sour. It is the difference between the amount of money in your account and the entire balance, or net balance, which includes open trades that are either going up or down depending on the market. Forexbeginners.net states:
Before trusting any particular system, a trader wants to know what is the largest loss he can face when he starts taking losses due to changes on the market that would lead to a temporary worsening of a performance of a trading system.
This is essentially what drawdown is; a way to calculate the odds of any particular investment due to the amount you currently have involved in the said venture.
Stop Loss
Similar to the way it sounds, a stop loss is a point in a trade when your investment stops in order to prevent loss. This is a particular point of choosing so that when a particular market starts to lose momentum you don’t lose more than the specific amount you’ve predetermined by your stop loss plan. This will let you rest easier, knowing that when the market turns, which it probably will at some point or another, you have a back door to protect some of your finances so you don’t hit rock bottom when things plummet. Of course, there are some investors who will ride out the downward trend and hope for it to begin climbing again; depending on your financial standing you may be able to afford this, but there’s always the chance that risking your money this way could end in the end of your investing career.
Take Profit Order
These can also be called limit orders because they put a limit on your investment when the rise of the current market you’re interacting with exceeds what you’d like to be involved in. They are similar to, but the opposite of a stop loss in the way that once you reach a certain level of profit, rather than loss, your trade is closed at that particular point. This order is set so that you can benefit from rises in a specific market before they begin to fall again and you lose profit. It’s a safety net of sorts to help control your investments in a game where there’s very little control in the long run. This allows you to attend to other work, family matters, or just take a time out away from the computer screen when you need it, and you can relax knowing that your investment won’t go below or above the points you’ve specified. If you want to be successful in Forex trading, you’ve got to utilize these tools to your advantage, and understand the pros and cons of each.
Scalping
This isn’t referring to selling tickets illegally outside of a rock concert; it actually has relevant meaning to the market, and can be a handy trick if you know what you’re doing. Scalping is a form of investing where a trader only keeps their investment in play for seconds in order to lower the risk of a move, while still reaping the benefits in small quantities. It may not give you huge leaps and bounds in the market, but it can certainly add up if you’re good at it. Of course there are rules to this sort of endeavor; Edward Revy of forex-strategies-revealed.com says:
There wouldn’t be any point in scalping for many traders if they weren’t offered to trade with highly leveraged accounts. Only ability to operate with large funds, of actually, still virtual money, empowers traders to profit from even a 2-3 pip move.
Think about it this way, the higher the amount in an account, the more you stand to gain from a smaller percentage of profit. Small fluctuations within seconds of opening and closing your trade are what provide the gain or loss in funds, so the more units involved, the more you stand to gain or lose.
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