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INTRODUCTION TO SYNTHETIC INDICES
TERMINOLOGIES:
Position
It is a trade that you hold open during a certain period of time.
Long Position
When you enter a long position. you buy a base currency.
Short Position
When you enter a short position, you sell a base currency.
Close a Position
If you enter a long (buy) position and the base currency rate has gone up. you want to get your profit.
To do so. you must close the position.
Stop-entry Order
It is an order that you give to buy above the current price or an order to sell below the current price
when you think the price Will continue in the same direction. It is the opposite of a limit order.
Equity
It is the total amount of money in your trading account. including your profit and losses. For instance, if
you deposited USD 10.000 into your account and you also made a profit of USD 3,000. your equity
amounts to USD 13.000.
Used Margin
It is the amount of money kept aside by your broker so that your current trading positions can be kept
open and you don't end up with a negative balance.
Free Margin
It is the amount of money in your trading account with which you can open new trading positions- Free
margin Equity — Used Margin
This means that if your equity is USD 13,000 and your open positions require USD 2.000 margin (used
margin), you are left with USD 11. 000 (free margin) available to open new positions.
Margin Call
Margin calls are a major part of risk management: as soon as your Equity drops to a percentage of the
margin used. your forex broker will notify you that you need to deposit more money if you want to
maintain your position.
Pip
PIP: Point in Percentage. In currencies everything is measured/calculated by the PIP (10 Micro pips= 1
full pip). The very last decimal is called a micro pip.
Leverage
Leverage allows a trader to trade without putting up the full value of the trade. Instead, margin
required. E.g., 500:1 leverage this means for every $1 you trade the broker can borrow you up to $500.
Lot size
How much you are going to leverage per pip.
Spread
Spread is the broker's way of making money whether you win or lose the trade. Anytime you enter the
market you will automatically be entered one pip above or below the price you enter at. In this way the
broker is always ahead one pip regardless if you trade is in profit or if it is negative. Keep this in mind
when trading remember to always account for you spread.
Swap
Commission charged by the broker for holding a position overnight.
Timeframes
Time frame refers to the period that a forex trader chooses to operate in. The time frames in forex can
range from minutes, hours, days, weeks or months. Synthetic indices traders may use multiple time
frames to analyse and track a trade. You want to make sure you open your chart on a higher time frame
(H4-W1) to identify the major trend and major S&R zones and then break it down in the smaller
timeframes (M15-H1) for entries.
TECHNICAL ANALYSIS
What is technical analysis?
Technical analysis is an analysis strategy for forecasting the direction of prices through the study of past
market data.
Applying a trend line for an uptrend.
3) Look for the lowest point on the chart, that will be your point A.
4) Look for the next higher low (HL), that will be your point B.
5) Draw your trend line from point A to point B and extend it.
6) If the trend line cuts through price action, look for a new point B.
7) If the trend line is too far from price action, make your point B your new point A (minor trend line)
8) The trend line should have two or more touches to be considered valid.
9) Once the trendline is considered valid you can buy on the third touch.
Applying a trend line for a downtrend.
3) Look for the highest point on the chart, that will be your point A.
4) Look for the next lower high (LH), that will be your point B.
5) Draw your trend line from point A to point B and extend it on the lower highs.
6) If the trend line cuts through price action, look for a new point B.
7) If the trend line is too far from price action, make your point B your new point A (minor trend line)
8) The trend line should have two or more touches to be considered valid.
9) Once the trendline is considered valid you can buy on the third touch.
Applying the Fibonacci tool for an uptrend.
1. Look for the higher low, that’s where you’ll start plotting the Fibonacci tool.
2. Look for the higher high, that’s where you’ll extend your Fibonacci tool to.
3. Your Fibonacci tool’s 100% should be at the bottom and the 0% should be at the top.
4. Once the market retraces to your 61.8 percent level you can place your buy orders.
5. You can take your profits at the 0% level.
Applying the Fibonacci tool for a downtrend.
1. Look for the lower high, that’s where you’ll start plotting the Fibonacci tool.
2. Look for the lower low, that’s where you’ll extend your Fibonacci tool to.
3. Your Fibonacci tool’s 0% should be at the bottom and the 100% should be at the top.
4. Once the market retraces to your 61.8 percent level you can place your sell orders
5. You can take your profits at the 0% level.
How to trade an uptrend
NB! Only enter buy orders when the price touches where the trendline and 61.8% level meet as shown
above.
Example:
How to trade a downtrend.
NB! Only enter sell orders when the price touches where the trendline and 61.8% level meet as shown
above.
Example:
RISK MANAGEMENT
It is important to always trail your stop loss when you’re in reasonable profits.
Author: Tangi Nakale
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