Glossary

A

Account history

B

Balance

Base currency

Broker

C

Candlestick shadow

Client log file

Contract for difference

Contract specification

Conversion arbitrage

Cross rates

E

Equity

Expert advisor

F

Force majeure

Futures contracts

G

Gap on the chart

H

Hedging

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Hedging is the parctice of protecting client's funds from unfavorable price fluctuations by opening a position in a contrary or opposing market.
Hedging: ensures protection from possible losses by the time of forward deal settlement; provides higher transactions flexibility and efficiency; reduces the costs related to trading real commodities; lowers the risks of losses as the changes in commodities prices are offset by the profit on futures.

As a rule, losses are limited either upon reaching the stop loss or when the price reverses and goes in the right direction. These scenarios are well-known, so there is no need to give them a closer look now. The thing is that traders who do not use money management bite off more than they can chew, while those who do not use risk management always attack but never defend.

Hedging on Forex is an essential element of protection against the risks and a guarantee of profit. Here is a simple example: you have opened a sell position on the EUR/USD pair based on the signals from the MACD indicator. Then, you got profit three times in a row. But suddenly the price has moved upwards, and your losses are growing for the past twenty four hours. This is where hedging takes place. So, how to do it correctly? A little maths and analysis will help us.

Position locking is also a popular tool, which is ineffective at best and which is often a self-deception. Moreover, it always comes with a negative swap, because the positive swap on the pair is less than the negative one. As a result, this action as such hardly differs from the position reversal based on the continuation of the movement and then on its complete return to the first position’s point.

Thus, the reason for any losses is an unexpected currency move (referring to the currency market). Note that it is the currency, not the currency pair! If you see that the reason for losses on the sell position on the EUR/USD pair lies in the falling dollar, then it is quite possible to take advantage of this situation by transferring the asset to another currency pair without the US dollar. In order to do this, it is necessary to determine the following:

1) Find the pair or pairs that correlate well with EUR/USD.

2) Make sure this instrument (-s) are more volatile than the first one(-s) so that the profit exceeds loss.

3) Open an opposite position (-s) on the US dollar. Important: positions should be opened in equal proportions.

It matters because the EUR/USD lot is not equal to the GBP/USD lot. The difference lies in the price per pip (for example, USD/JPY) and the volatility of a pair. These factors should be allowed for in order to transfer the position to another pair effectively. Otherwise, the discrepancies can become too serious. The initial balance is more important for us, then comes greater profit in relation to losses. The next goal is to achieve a swing effect after the rally ends which brings losses on the EUR/USD pair and generates profit on GBP/USD. A strong movement is followed by the consolidation phase, and at a certain moment, the losses on the first pair are reducing. At this point, you have great chances of exiting a position with profit. The total positive swaps will give you additional support. In fact, using this method, you can transfer the invested assets to the EUR/GDP pair. We took a simple example. However, more complex combinations with additional currency pairs can be used in order to achieve better results.

In order to determine the degree of correlation, the algorithm based on the formula of linear correlation is usually used, which is attached to the MT4 indicator. It is also worth noting that hedging methods are quite diverse. Thus, the given example could also use the pairs without common currencies. However, in this case, the profit/loss spread could be higher. The key to hedging is achieving the needed balance by diversifying your funds.

Types of hedging:

Classical hedging

Classical hedging implies holding the opposite positions in the market. This hedging method was used by the dealers of the farm products in Chicago, USA.

Full and partial hedging

Full hedging involves the protection against risks for the whole sum of the transaction. This type of hedging completely eliminates possible losses related to price risks. Partial hedging insures only a part of the actual transaction.

Anticipatory hedging

Anticipatory hedging involves buying or selling well before a deal is coplated in the physical market. In the period between the conclusion of a deal in the futures market and the conclusion of a deal in the physical market, a futures contract serves as a substitute for a real contract for the supply of goods. Also anticipatory hedging can be applied through the purchase or sale of an urgent commodity and its subsequent execution via the stock exchange. This type of hedging is the most common in the stock market.

Selective hedging

In selective hedging, the deals in the futures market and spot market vary in the volume and time of order execution.

Cross hedging

Cross hedging is characterized by the fact that the operation in the futures market involves a contract not on the underlying asset in the physical market, but on another financial instrument. For example, on the real market there are operations with shares, while the futures market trades futures using stock indices.

I

Index

Indicator

Intraday trading

L

Leverage

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Leverage is the ratio between the amount of the margin and the borrowed funds allocated for it: 1:100, 1:200, 1:500. The leverage of 1:100 means that a trader is required to have an amount in the trading acount which is 100 times less than the transaction sum.

The lending ratio is called the leverage. Its value may vary widely from 1:1 to 1:500. It means that a customer can buy/sell currencies in the amount exceeding the margin 500-fold! For example, if a trader chooses the 1:100 leverage and makes a deposit of $100, then he/she has the opportunity to purchase the currency for 100*100=$10,000. After buying a currency with a favorable change in the rate, a trader executes the sale, thereby deriving profit from currency rate fluctuations. In other words, a trader completes the transaction. At the moment of closing the trade, the credit automatically closes, the margin remains on the trader's account as well as the earned profit. This scheme allows traders to gain significant profits sometimes exceeding the amount of the margin involved in a certain transaction even with slight changes in foreign exchange rates. The trader's risk is limited only by the amount of the margin, as the dealing center does not provide the real amount of the opened transaction, but only guarantees the crediting of the loss or profit in full at the deal's closing. Closing a transaction is the opposite operation: when buying a certain amount of currency, the selling is doen in the same volume and vice versa.

The definition of the leverage is closely linked to the margin. Yet, at a closer look, there are differences between these two concepts. But for a seculator, the benefit is the same: the larger the leverage, the more is the ratio of his/her own funds and profitable speculative transactions. How does it affect the trading itself? Let us start with the history of the margin.

Initially, the margin trade principle was associated with transactions in the commodity markets. In the 19th century, the commodity exchanges were markets on which trades were carried out in cash. The brokers, who provided services for transactions' execution, transfers of money and account management, were the dealers in this market. The brokers maintained accounts using a special method of recording, the so-called "circle" recording. This method was the most efficient one to settle accounts between clients at frequent resales of goods. The circle method of calculations had been applied in the futures market up to the 1920s, as long as it met the needs. Within the framework of this method, the exchange members who were making the deals had to fulfill their obligations set by these contracts as participants of the agreement. They were the only ones to be responsible for the execution of deal obligations. Thanks to such a settlement system, clients did not need to deposit their own funds as a financial guarantee for the execution of an exchange contract and could enjoy trading at lower prices. The previous method of settlements was more advantageous when most of transactions were purely commercial, i.e. purchase and sale of contracts implied a real demand for goods or the good itself. The members of the exchange had to have substantial financial assets to guarantee the execution of obligations under any condition.

Liquidity

M

Margin

Market opening

N

Normal market conditions

O

Obvious error

Open position

Order

P

PAMM account

Pending order

×

A pending order is placed when opening a trading position. A pending order is an instruction to the broker to buy or sell a currency pair when the price reaches the pre-defined level mentioned in the order.

There are four types of pending orders:

Buy Limit is an instruction to buy when the future ask price gets equal to the specified value. Herewith, the current price is higher than the value of the set order. Orders of this type are usually placed in anticipation that the instrument price, having declined to a certain level, will increase. It is impossible to set Buy Limit above the current ask price. For this, you have to use Buy Stop orders.

Buy Stop is an instruction to buy when the future ask price gets equal to the specified value. The current price level is lower than the value of the set order. Typically, the orders of this type are set in anticipation that the instrument price will reach a certain level and continues to grow. It is impossible to set Buy Stop orders below the current ask price. You have to use Buy Limit orders for this.

Sell Limit is a request to sell provided that the future bid price gets equal to the specified value. In this case, the current price level is lower than the value of the set order. These orders are usually set in anticipation that the instrument price, having risen to a certain level, will stop its uptrend and starts to decline. It is impossible to set Sell Limit orders below the current bid price. For this, you have to use Sell Stop orders.

Sell Stop is a request to sell when the future bid price gets equal to the specified value. Inthis case, the current price level is higher than the value of the set order. Orders of this type are set in anticipation that the instrument price, having dropped to a certain level, will continue to decline. It is impossible to set Sell Stop orders above the current bid price. You have to use Sell Limit orders for this.

To set a pending order, you have to click on the New Order window and change the order type from Immediate Execution to Pending Order.

Right after you choose the Pending Order option, some fields will appear for you to specify the order execution conditions: the currency pair, the volume and rate of the position you open, the order type as well as stop loss and take profit. You may also leave a comment on the order and set the expiration date, upon which the pending order will be automatically removed.
After setting the required parameters, click on the Set Order button to place the order with the specified execution conditions. You can check the order you set in the Terminal field in the Trade tab. To change the conditions of the pending order or delete it, you need to right-click on it and select Modify or Remove the Order in the pop-up menu.

Pip

Pipsing

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This trading approach is used for gaining profit from intraday currency fluctuations. Some traders open more than 200 deals a day while holding a position open for just several minutes. Of course, the profit from each position is rather small, but in total it can constitute a significant amount.

The idea of pipsing is to earn on intraday movements. On average, currencies move for about 50-60 points during the day if we take the daily opening price and closing price. However, currency rates do not always go up or down within the day, but rather make minor fluctuations what makes the total amount of pips quite big. Pipsers are trying to catch these particular fluctuations.

This approach is comparable to the roulette – the same playing methods, approximately the same odds, though the probability of losing on Forex using this approach is twice as high.

The system is doomed to failure. There are several reasons for that.

1. Trying not to miss even the smallest rate movements, pipsers set the stop loss very close to the current market price.

A stop loss approaching a price rate increases the possibility of suffering losses from the market noise if the strength of bulls and bears has been misestimated, even though the trend direction has been determined correctly. It is easier to make a mistake when defining a price direction for the next hour than determining the direction for the whole day.

The easiest way to escape the execution of a stop loss order with a risk of a loss is not to place such an order at all. But in this case you risk losing even more money if a strong price movement is against you. This happens when the price moves so far that it is unlikely to return to the previous levels in the next few minutes or hours. When keeping a large part of the deposit as a margin without placing any stop loss levels, the risk is high to get a margin call, i.e. losing the whole deposit.

2. Trading real money provokes stress. As a rule, this strategy is first tested on demo accounts, since there is no real money involved. So, there is no fear to lose it, and orders are executed automatically, i.e. instantly.

Therefore, there are several factors, including the speed of orders execution and stress that worsens with each pip when the price moves in the wrong direction. The pipsing strategy implies constant presence in the market, which certainly brings stress. This can lead to ill-considered decisions.

We should also mention the fact that brokers do not like clients who request a huge number of transactions. There are some restrictions on the quantity of requests per certain period of time. So, aggressive traders who request orders every second can be asked to close an account.

A positive result is more probable in case of scalping. It is similar to pipsing, but its goal is more than several pips per trade.

Here are several approaches of the scalping strategy:

- simultaneous trading on several currency pairs and an attempt to investigate their movement as a group. 90% of these systems are based on the group movement of currencies against the US dollar. However, there are systems based on the euro and the pound;

- traders choose a driving currency pair and a lingering one. Let’s say, EUR/USD is chosen as a signal pair and AUD/USD as a currency pair for trading (it is supposed to move with delay compared to the euro);

- either M1 chart or a tick chart is chosen for trading;

- most manipulations are performed through orders;

The ideas described above are widely discussed on different forums. These approaches require a lot of nerve and a good reaction.

Point

Q

Quotation

Quotes feed

S

Scalping

Server log file

Spam

Spike

Spread

Stop Loss order

×

Stop loss, or safety order, is an order placed with a broker to automatically close a position when the price reaches a certain level. You can set the safety order to minimize losses in case of unexpected market moves.

Stop loss is an order to restrict the risks rather than gain profit. Unfortunately, not everyone knows how to use this risk-limiting order and excludes it from their strategies which can lead to disastrous results.

One of the money management rules reads: “Restrict losses for every deal to no more than 5% of the balance.” In other words, a stop loss can go no further than a dedicated number of points depending on the volume of an order for each deal. But this rule is not suitable for every situation. According to long-term charts, a lower stop level is needed to take noises into consideration and a higher one is necessary to fulfill the stop/profit 1:3 principle. Setting a high stop loss level on the 15-minute chart means insufficient profit, while setting it higher means catching noise. For aggressive speculators, such prospects are unacceptable, as when the order volume increases, the stop size reduces. So, where should it be placed?

At first, you need to decide where it is safe to put the stop loss in this particular situation. If you use channels, the stop is usually placed outside the channel boundaries. If you use support/resistance levels, then it should be placed below/above the levels. Thus, in case of a breakout of channels or boundaries, the trend is likely to reverse, and your money will be saved. If there are neither channels nor boundaries around, then the best option for setting a stop loss is above or below the previous sell or buy candlestick. There are several standard indicators that help define exit points - Bollinger and Parabolic. With Parabolic, everything is simple: the stop is placed at the indicator points, and the Bollinger works according to the channel rule.

After defining all the “above” and “below,” you should measure the interval between the expected entry point and the stop loss. If possible losses are less than 5% and the profit is quite obtainable, then you can safely enter the market.

Quite often, these details are not enough to determine whether the exit from the position is set correctly or not. If possible losses are more than 5% and the profit grows sky-high, it is better to wait for a more favorable moment. If the stop level is too low, it is better to give it more room.

As soon as the price has reached a certain positive distance from the entry point, the stop loss may start moving after it. According to the “above/under the previous candlestick” rule, it can catch up with the price at the point where it loses momentum and prepares for a pullback. For these purposes, a floating stop loss was designed, but it is not effective due to the restrictions on points.

Such ways of risks limitation can make it difficult to test strategies and calculate monthly return. However, they are more flexible than a specified size of a stop loss.

Stop out

Swap (swap - storage)

T

Take Profit order

Tick

Trading platform

Transaction volume

可

可用保证金

追

追加保证金

非

非市场报价