There’s a lot of information that beginner traders need to digest before start placing orders. We’ve picked some of the basic, but the most important ones every trader should know:
Trading is a highly leveraged activity. Leverage enables traders to increase their purchasing power by borrowing funds from their broker. The biggest difference between investing and speculating is the use of leverage. Investors purchase and hold physical assets without the help of leverage and therefore, they don’t need to worry about interest charged for keeping orders open longer than a day. Brokers offer up to 30:1, 50:1, 500:1 or even 2000:1 leverage on rare occasions. By choosing 50:1 leverage, the amount of money a trader puts in his trading account gets 50 times more purchasing power.
Lot in trading
In trading, a lot is a unit measuring a transaction amount. Understanding the lot meaning in FX trading helps novice traders better select their position sizes and follow risk management rules. There are 4 lot unit sizes.
- 1 Standard Lot equals 100,000 units of the base currency and 1 pip (Smallest change in price) = 10 USD; Therefore, if you purchase one standard lot of EUR/USD and the price moves 50 pips in the predicted direction, you will make 50×10 USD = 500 USD.
- 1 Mini Lot equals 10 000 units of the base currency: 1 pip = 1 USD;
- 1 Micro Lot 1,000 units of the base currency: 1 pip = 0.10 USD;
- 1 Nano Lot, 100 units of the base currency: 1 pip = 0.01 USD.
Understanding liquidity is a must for trading and investing profitably. High liquidity means that traders can easily buy and sell their assets. High liquidity brings good market activity, more trading opportunities and tight spreads. Spread is a difference between buy and sell price, and tighter the spread, the better it is for the trader.
Some markets are more liquid than others. For instance, NASDAQ and New York listed stocks are more liquid than any other stocks in the world.
When it comes to Forex markets, London and New York trading sessions are the most liquid time for trading. What’s more, it’s important to note that trading major currency pairs comes with tighter spreads and highest liquidity. In a major pair, one part is always the US Dollar and the other part is any of the major world currencies: EUR, GBP, JPY, CAD, NZD, AUD, CHF.
Return on Investment (ROI)
Return on investment is easy to understand, as there’s no deeper meaning to this term. The ROI’s formula is calculated by net income divided by the total cost of the investment.
ROI = Net income / Cost of investment x 100
Understanding compounding from the very beginning can help you develop healthy expectations and make better investment plans.
Compounding is reinvesting your profits and making more money by opening larger positions without increasing your risks percentage wise.
Let’s say your investment makes 10% profit every year. 1,000 USD will become 1,100 USD next year. The next year it will become 1,100 + (10% of 1,100 = 110) = 1,210. As you can see, even if we don’t change anything other than the fact that we reinvest our profits, every year profits grow larger and larger.
If your goal is to invest a large capital and make more money while at the same time having a low risk percentage wise, you need to search for the strategies that will help you attract investors. Investors love money managers that have steady profits and manage drawdown periods well. And therefore, adopting risky strategies is not a good idea.