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Showing posts from December, 2018

TYPES OF BUY SELL IN OPTION

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TYPES OF BUY SELL IN OPTION    Having reviewed the basics of option characteristics, we are now aware that we have a number of investment choices: stock, calls on the stock, and puts on the stock. For each of these, we can initiate a position either by purchase (referred to as a long position) or by sale (referred to as a short position), thus giving us six different initiating strategies : * Long stock * Short stock   * Long call   * Short call   * Long put   * Short put These tools are what we can use to construct all option-based strategies. By combining these building blocks, the individual investor can create strategies ranging from basic to complex. Mastery of each of the individual building blocks is essential for understanding how they work in combination. Therefore, we will now look at each of these six alternatives in some detail. Retail investors are already familiar with one of these building blocks: long stock. With an understanding of the oth

INTRODUCTION TO OPTIONS

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INTRODUCTION TO OPTIONS   An option is a contract written by a seller that conveys to the buyer the right — but not the obligation — to buy (in the case of a call option) or to sell (in the case of a put option) a particular asset, at a particular price (Strike price / Exercise price) in future. In return for granting the option, the seller collects a payment (the premium) from the buyer. Exchange- traded options form an important class of options which have standardized contract features and trade on public exchanges, facilitating trading among large number of investors. They provide settlement guarantee by the Clearing Corporation thereby reducing counter party risk. Options can be used for hedging, taking a view on the future direction of the market, for arbitrage or for implementing strategies which can help in generating income for investors under various market conditions OPTION TERMINOLOGY   • Index options:  These options have the index as the unde

LACK OF DICIPLINE IN TRADERS

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LACK OF DISCIPLINE IN TRADERS Let’s say you are new to futures trading. Or let’s say you have traded futures in the past without much success and have decided to start fresh with a new approach and a clean slate. And you’ve done it all and followed every step. You have: • Determined how much money you can truly afford to risk • Opened a brokerage account with that amount of cash • Settled on a diversified portfolio of markets • Developed a trading system in which you have complete confidence • Developed specific, unambiguous entry and exit criteria • Back-tested your system and have generated good hypothetical results •Walked your system forward, paper traded it over new data and have generated good results • Sized your account so that you reasonably expect no more than a 25% draw down • Built in risk controls including stop-loss orders to minimize your risk You’re as ready as you can be. With high hopes and great anticipation you plac

MARKET TRENDS

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MARKET TRENDS Now that we understand how to read the candlesticks, let ’s turn to market structure. The forex market has three segments: trend, range, and breakout. Trend A trend can go either up or down. A trend that is moving upwards is called an uptrend. A trend that is moving downwards is called a downtrend. Uptrend An uptrend is identified as prices having a series of higher highs and higher lows. The highs are the peaks that prices reach intermittently. The lows are the valleys that prices fall to before heading up again. Hence, an uptrend is formed when there is a series of highs going higher and a series of lows going higher. Downtrend A downtrend has prices moving in a series of lower highs and lower lows. Traders use a trending strategy when the market is moving in an uptrend or a downtrend. When the market is in an uptrend, we would go long. If the market is moving in a downtrend, we would go short. Trend Lines Trend lines are lines

WHAT CAUSES THE PRICE OF CURRENCIES TO FLUCTUATE

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WHAT CAUSES THE PRICE OF CURRENCIES TO FLUCTUATE The value of a currency rises or falls in relation to the forces of demand and supply. When the demand for a currency exceeds the available supply, the value of the currency tends to rise. Conversely, when the supply of a currency exceeds the available demand, the value of the currency tends to fall. Let ’s look at four of the most important factors that cause prices of currencies to fluctuate: economic factors, political factors, natural disasters, and speculation. Economic Factors When traders look at economic factors, they are searching for one key word: growth. When growth is non-existent or negative, the value of the country ’s currency tends to fall. This is because the currency is not viewed as attractive or valuable, and traders start selling it. Conversely, when growth is positive, the value of the country ’s currency tends to rise. This is because more traders end up buying the currency. Traders lo

HOW MONEY IS MADE IN TRADING

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HOW MONEY IS MADE IN TRADING BUY LOW, SELL HIGH Forex traders make money by speculating on the movement of currency rates. There are only two ways to do this. The first way is to buy, expecting prices to rise. The second way is to sell, expecting prices to fall. For Example Buy The current rate for AUD/USD is now 1.0325. You enter into a buy position because you expect the Australian dollar to strengthen further against the U.S. dollar. A buy trade is termed a “long position” in the forex market. After three hours, the AUD/USD rate is at 1.0375. You were right, and you made 50 pips on this trade. Another way of saying this is that your long position took profit. Let ’s have a look at Example . Sell The current rate for EUR/USD is at 1.3142. You enter into a sell position because you expect the euro to further weaken against the U.S. dollar. A sell trade is termed a “short position” in the forex market. After two hours, the EUR/USD rate is at 1.3112. You

RISK OF EXCESSIVE LEVERAGE

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RISK OF EXCESSIVE LEVERAGE    Leverage is a double-edged sword. While it has the potential to magnify a trader ’s gains, it certainly has the potential to magnify losses as well. In fact, the greater the leverage, the greater the risk. Let ’s take a look at an example. Both Trader A and Trader B open an account with a broker and start trading with a capital of USD10,000. Trader A uses leverage of 50:1 while Trader B uses leverage of 10:1. Both traders then decide to sell EUR/USD because the ongoing sovereign debt crisis is putting some pressure on the euro.   Trader A ’s total contract size is 100 × $10,000 = 1 million. This equals to 10 standard lots. Trader B ’s total contract size is 10 × $10,000 = $100,000. This equals to 1 standard lot. For EUR/USD, we learned that 1 pip equals USD10 for one standard lot. If the trade goes against them by 50 pips, both traders will incur these losses: Trader A: ( 5 lots ) × ( 50 pips ) × ( $ 10 / pip ) = USD2,500 Trader B: ( 1

FOREX QUOTES

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FOREX QUOTES   Forex prices are quoted in currency pairs and almost always to four decimal places. For example, if a forex quote is given as EUR/USD = 1.1413/1.1415, the currency on the left is termed the “base currency” while the currency on the right is termed the “counter currency.” The base currency always has a value of 1. In the example, the euro is the base currency while the U.S. dollar is the counter currency. This is how we would read the forex quote: This forex quote tells us two things. First, if traders are eager to purchase one unit of the base currency, they would have to pay 1.1413 U.S. dollars to buy 1 euro. If, however, traders are eager to sell one unit of the base currency, they would receive 1.1413 U.S. dollars for selling 1 euro. It is also important to note that the exchange rate always fluctuates with changing market conditions. At any time, the euro can weaken or strengthen against the U.S. dollar. If the EUR/USD quote moves up from 1.1