Education Archives - Forex Education

What Does Trailing Stop Mean?

As we define in the previous article “What is stop-loss order“, a stop-loss order is an instruction placed with a broker to buy or sell a security by setting a stop loss level, a specified amount of pips away from the entry price.

The stop-loss price level can be fixed but it can change too. So, What is the trailing stop order?

A trailing stop or trailing stop-loss is an order that moves the stop-loss price level with each new price tick by the trial amount or trailing stop loss percentage away from an asset current market price. For BUY trade, if the security price rises, the stop price rises by the trail amount, but the stop-loss price doesn’t change if the security price falls. For the SELL trade, if the security price is going down, the stop price fall by the trail amount, but if the security price is going up, the stop-loss price doesn’t change.

What is a trailing stop quote? A lot of brokers use the term trailing stop quote to make it clear that the stop order will only be triggered once a valid quoted price level in the market has been met, without negative slippage.
In that case, if we have a BUY order and EURUSD has a 1.3 price level stop loss, the order will close exactly 1.3 or above 1.3.

Trailing stop BUY example: If we buy the asset at $100 and set a trailing stop to be $10 from the beginning price then when the price goes to $102 my new stop loss will be $102-$10=$92. If the price goes to $150 then my stop loss will move to $150-$10=$140 etc. Instead of a fixed dollar amount, we can use the percentage.

How does a trailing stop work in forex

The reality is that several traders realize that they should accept their losses and let them go as quickly as possible. On the other hand, they also have been told that they should let their profits continue to flow for an extended period. Yet, if someone is not aware of a tool to aid one in implementing this strategy, it is necessary to understand how to use trailing stop in forex. It is quite similar to the application of the usage of a stop order that is regular, but it can be placed to flow with the market.

Take into consideration, for example, if you desire to ride along with the EUR/USD, then you place an emergency stop that will undergo a phase of triggering if the market happens to not move in your favor. Following the passing of a day or a few more, when the trade is tending toward your turn, you desire to conduct a locking in some profit to find out what will occur. It is possible to place a stop in the territory of a positive gain. This could be seen as the placement of a trailing stop. If there is the continuance of the market flowing toward your favor, the profit you have locked in will increase. This will be an ongoing favorable situation until the market slides back in a downward trend and reaches your stop placement.

The trailing stop’s critical role is to engage in the augmentation of the profit lock while the market is in a moving phase. As such, there is no requirement for you to engage in interventions or make adjustments. The trailing stop’s functionality permits you to engage in following trends with a level of safety in your preferred comfort zone so that there is no need for constant monitoring.

Regarding the trailing stop, you can also engage in the trailing stop placement for the sake of longer-term trading. You can place your stop far removed from the market trend and permit things to undergo development. This works rather successfully for slow trading systems, which tend to engage in the locking in of profits for extended months or days. When someone participates in setting up a target that is long term, then it is truly advised to place a trailing stop as well. This will permit the person to set up the total trade at an early stage while granting it the freedom to take its route.

With the reality that the forex market is running for a time frame of twenty-four hours over six days each week, this results in the need for many hours to undergo monitoring. Instead of enduring a lack of sleep or interrupted sleep, it makes wise sense to apply the trailing stop to one’s trade in this case. The remarkable result is that the lock of your profit can increase even when you are soundly asleep. The market will continue to go on as it does, while your trade will be able to conduct any needful adjustments or stops.

Disadvantages of trailing stop loss
Some traders advice to avoid trailing stop loss because they are automatic.
Automatic trailing stops loss move stop loss always per defined number of pips or percentage without an analysis of the current market situation. For example, an automatic trailing stop loss can move the stop price level for 15 pips all the time even that market has 100 pips daily volatility (ATR) or 250 pips daily volatility.

Static stops are great for novice traders as, along with making them aware of this tool, they also help them understand risk management. Trailing stops are for those looking to maximize their profits and have already learned the other concepts. This type is about money management rather than risk management. These stops are not stationary and move as the trades move in favor of the trader.

Here’s an example of your understanding. Let’s assume that a trader has taken an extended position and is trading EUR/USD at 1.3200. The pip stop is at 1.3150, with a 100 pip limit at 1.3300. Consider a situation in which this trader decides to move up to 1.325o; he will adjust the stop up to 1.3200. This 0.050 up the original stop value. A trailing stop moves to the entry price of the trader or the breakeven price. This means that if his chosen currency pair reverses and moves against him, the trailing stop will protect the gains that he made at his original position.

Traders can remove the initial risk by using this break-even stop permit. They will feel protected and can move to other Forex trade opportunities. The trailing stop has different types; the easiest one to work with is a dynamic trailing stop. It adjusts the stop for every single pip that will move in favor of the trader. Taking the same example mentioned above, if our currency pair moves to 1.3201 (1.3200 being the starting entry), the stop will automatically adjust to 1.3151.

How the best way to use trailing stop?

If you want more control over the stops, you can always move them manually. Experienced traders who like to trade in a fast-moving market or do trend trading often move the stops manually. This is because the price action is critical in this kind of trading.

Trailing Stop after hours

So, do trailing stops work after hours? Trailing stop orders won’t execute during after hours, the extended-hours session. The trailing stop orders that traders set during extended-hours will queue for the market open of the next trading day. This trailing stop after-hours rule applies to any trading platform or trading broker.

Should you use a trailing stop loss?
Trailing stop loss can be an interesting strategy in trading but traders need to avoid a completely automated trailing stop process. The best results traders can get if they manually set trailing amount or percentage based on current market conditions.

How to Set Stop Loss in Forex?

by Fxigor

There is one question in trading which gives headaches to many traders: How to Determine Stop Loss in Forex?
It seems easy – traders should place stop loss for each position when they trade. The key manner to provide the assurance that the account does not undergo such a damaging situation is to apply the usage of an order for stop-loss that will provide limitations concerning the level of exposure to risk factors. But having the knowledge regarding where to place an order for stop loss pertaining to each trade is not considered to be ample in order to make you a trader that is profitable. This based on the premise that it is also needful to possess the correct size in regard to the distance of a designated stop loss in order to permit you to remain for an extended period in the trade session in order to view the movement of the price in the direction that you select.

What is the problem when determining the stop-loss of a position?
The downside is that there does not exist any easy answer concerning the spot where you should place the stop loss when you are engaging in forex trading.
There is no clear consensus on how to determine a stop-loss price level for exact trade. The largest group of traders advises that the stop loss should be set as close to the entry-level as possible (tight stop-loss), while the other group suggests a greater stop loss distance (wider stop-loss).

Problem Solving: How to Determine Stop Loss in Forex?

First, let us see the easy part. How we can place stop loss in the Metatrader platform?

In this video below we can learn what is stop loss and how to set stop-loss:

In the image below you can see how to place stop-loss orders and modify stop-loss orders in the MT4 platform:

In the image below is described process of stop-loss placing in MT4 Android platform:

Now let us see what theory says.

Stop-loss is a brilliant tool that can help you in protecting your investment. Once you learn all about the key levels, you can easily define price action strategies and find out a risk-reward ratio that is suitable for you. Once everything is set, it is time to use a stop-loss to take your trading style to a different level.

Principles to apply:

The stop-loss price level can be set based on previous low or high (or Fibonacci levels).

It cannot be denied that there are various principles which you should apply for guidance when you are making decisions in regard to the placement of a stop loss. You may engage in the application of a particular principle when you are conducting trade in the long term, like a swing trade. But then you may decide to apply yet a diverse principle when you are conducting a trade that is classified as being intraday. The principles that we mention will function well when they are utilized in a precise manner with the proper type of trade.

Important price levels are the best approach to determine the stop-loss level. Previous high or previous low or Fibonacci levels are excellent entry, stop loss, and target levels. For example, traders can BUY a currency pair if the price is above yesterday’s high. The excellent stop loss value can be yesterday’s low price level.

A stop loss should be placed where there will be the invalidation of your trade perception.

This principle is noted as being the primary one that consideration must be given to at all times when you are making the decision in regard to the spot for the placement of your stop. If you are conducting trade in the long term, you should attempt to ensure the placement of the stop loss in such a situation that when the price achieves its level, then trade in the long term would not be feasible. In other words, your stop loss must experience placement at a spot when the price achieves its level, this sets up the trade in the long term and experiences invalidation. This allows you to have space for the setting up of trades in the short term.

The Stop-loss level can be determined as a trend invalidation price level. For example, If the trader’s analysis shows that the bullish invalidation level is between 1.3 till 1.303 price level range, in that price range stop-loss can be set. Usually price invalidation level can be moving average. For example, if the daily close is above some important price level it is a bearish invalidation price level. If the daily close is below some important price level it is a bullish invalidation price level.

Trading example:

Trader BUY EURUSD at 1.35 when the daily close is above SMA200.

After 5 days the price is at 1.38 and SMA200=1.365.

A trader can move stop loss at 1.365 and set SMA200 as the stop-loss price level.

It is noted that this is also true concerning trades in the short term in such cases that there is the placement of an order for stop loss at a spot that when the price is achieved, this results in the changing of the prince trend. This means that there is no longer support for a trade in the short term but rather trade in the long term. Due to the reality that this is the primary and most relevant principle in terms of giving consideration to the placement of an order for a stop loss, it is needful for you to think of it first prior to applying the usage of other factors and principles.

Risk reward ratio and stop-loss – Consideration is given to the ratio for the risk in comparison to the reward.

Recently, we explained the risk reward ratio. This principle is regarded as being the one that is second in terms of a high level of importance in such cases that you are making a decision about where the placement of your stop loss should be. A great majority of traders hold the preference of entering into the conducting of trades that possess a ratio for the risk in comparison to the rewards being 1:2. This indicates that for the risk of each dollar (pip), there is the possibility to result in gaining two dollars (2 pips) in such cases that the trade is directed in their favor. It is noted that this ratio pertaining to the risk in comparison to the rewards is not the only one that you can apply due to the reality that there are some setups for trades that may permit you to opt for a ratio for the risk in comparison to the reward at a rate of 1:5. Moreover, there is an even smaller ratio possible for risk in comparison to reward at a rate of 1:1.5 based on where your entrance into a trade is as well as your possible target. Read more about stop-loss and take profit in our article.

When you are careful to apply this principle, it is imperative for the placement of your stop loss to be situated in such a manner, so that it will permit you to attain your possible target based on the setup of the trade.

Take into consideration, for example, that if you are conducting trade for the sake of a breakout that has the possibility of collecting one hundred pips in such a case that this is noted as being the amount of distance to get to the following level of support, you could dare to engage in the risking of fifty pips for this particular trade in order to the opportunity to collect a profit of one hundred pips, which is regarded as a rather substantial ratio of 1:2 for risk in comparison to reward.

Thus, it is realized that this same type of rationale is administered in such cases that there is the targeting of pips that are less. It is noted that there could be the impact of the placement of the stop loss in an effort to preserve the ratio preference in terms of risk in comparison to reward.

Caution must be taken

It is the tendency for a large number of traders to have a fixation regarding the ratios of their risk in comparison to reward. The fixations can be so strong that they fail to give heed to the first principle in how to place the stop loss at a spot where the trade idea will experience invalidation in such a case that the price reaches the designated level.

It is wise to avert engaging in the placement of a stop loss at distances that are noticeably short in order to augment the ratio for the risk in comparison to the reward at the sacrifice of permitting the grade ample space to be directed for your benefit.

While there is no stop-loss strategy that will work exactly the same for every trader, here are some tried and tested ones that you can use or learn from:

1. Pin Bar and Inside Bar

Every trader can set the stop-loss as they see fit but there are some places that are recommended by experienced traders and brokers. For the pin bar strategy, irrespective of whether the market is bearish or bullish, the stop-loss must be placed behind the pin bar tail. The pin bar trade will become invalid as the prices hit the stop-loss there. This proves that traders must not panic when prices hit the stop-loss. It is not always a negative thing. This is the market’s way of telling you that you need to set a stringer pin bar.

If we compare the pin bar strategy with the inside bar FX trading, the latter offers two options for the placement of a stop-loss. You can place it behind the inside bar’s low or high, or the mother bar’s low or high. The second option is safer. Just like in the pin bar strategy, if the prices hit the inside bar, the trade will be rendered invalid. This is considered a safer strategy due to a larger difference between the entry and the stop-loss. If you are trading a choppier currency pair, the buffer created by this strategy will allow you to stay in the trade for a substantial period of time.

The placement of a stop-loss behind the inside bar’s low or high is beneficial as it offers a better risk-reward ratio. The negative of this strategy is that your trade can be stopped even before it gets the chance to reach its full potential of ending in your favor.

While the second option is riskier because of less difference between the entry point and the stop-loss, which strategy will be more suitable for you will still depend on your overall trading strategy, risk tolerance, the currency pair that you are trading, and other factors.

2. The Set and Forget

The set and forget stop-loss strategy or the hand-off strategy is very simple to understand. The trader has to decide where to put the stop-loss and once they have done it, just let the market move as it feels. Unlike the previous strategy where you were susceptible to getting stopped before the trade could move, this strategy mitigates that problem by retaining the stop-loss at a safe distance.

Investors and long term position traders use the “Set and Forget” strategy very often. Usually, they risk less than 0.5% from their portfolio, put wide stop-loss and wide targets, and do not change stop-loss sometimes several weeks or months.

Traders feel liberated when they use this hands-off strategy as they are not required to keep a constant eye on their strop-loss. You give the market a chance to run its course while you sit back and watch it happen. As it is simple to understand and does not require constant attention, it is perfect for novice traders.

One of the most prominent drawbacks of this strategy is the maximum allowable risk that persists from start to end. This means that when you put a part of your capital at risk, you actually stand a chance to lose it should the market does not move in your favor. From when you enter the trade and close, you don’t get the opportunity to protect your capital. Once you have set the stop-loss, it will run its course.

The other disadvantage of this strategy is that you can be tempted to move your stop-loss. This is not is human nature to sit idle when their money is on the line. As the strategy works well when you set the stop-loss and forget about it, many traders will not be able to do this.

3. Move a Stop Loss to Breakeven

This strategy is different than the other two is because the traders can finally allow the market to help them in organizing a strategy. They can read the market vans analyze the amount of capital that they need to defend. You can use the 50% strategy on a pin bar setup. Let’s assume that you enter a bullish pin bar when it’s time for a daily close or entry. The market finishes a little higher the following day than your entry.

Like every other strategy, this one isn’t perfect either. It offers protection to only half of your investment while the other half is at risk. This can sit differently with different traders. We cannot consider it an actual downside as some traders prefer to take this risk. If you are one of them, this strategy will be perfect for you.

However, the risk of trade stopping prematurely is still there, especially if you are trading a choppier currency. Since the market plays a crucial role in this strategy, whether your stop-loss strategy is acceptable or not will also be decided by the Forex market.

Considering the same example as used above, had the market closed around the low on the second day, this strategy would not have worked. This is because the stop-loss would have moved too close to the prevailing market prices. If you are in such a situation, a better option would be to leave the stop-loss at its original position. The 50% stop-loss strategy becomes riskier when trading an inside bar.

How do I set stop-loss?

In the first step,

What is Stop Loss Order?

by Fxigor

Forex trading can be very exciting. You can do it even if you are new to instrument training. Traders and investors need a small capital and an internet-enabled device to jump on this bandwagon. You will also need a broker who will offer you a trading platform that you can use to trade. Most of these trading platforms offer different features that can help traders, especially the new ones, in managing their activities and keep losses on the other side. One such brilliant feature is an FX stop-loss order. When used right, this feature can save you from losing every penny.

Stop-loss meaning

What is Stop-Loss Order?

A Stop-loss order is an instruction placed with a broker to buy or sell a security by setting a stop loss level, a specified amount of pips away from the entry price. The Stop-loss order purpose is preventing additional losses if the price goes against the trading position.

If traders have a BUY order, Stop-loss is an order instruction that tells the trader’s broker to sell the security when it reaches your stop-loss level price. Traders are encouraged to put a stop-loss against the price beyond which they would not like to take the risk. As soon as the prices reach your stop-loss order, your broker will sell your securities before the prices move further down, saving you from bearing huge losses.

How does stop loss work?

Using Stop-loss is based on the trader behavior to make Buy or Sell position. Stop-loss level for BUY position is price level below the entry price, and target above the entry price. The Stop-loss level for the SELL position is the price level above the entry price and the target below the entry price. After entry order is made, market price fluctuates between stop loss and target price. In one moment trade will be closed if reach stops loss or target price level.

Stop-loss order losing trade example:

BUY EURUSD at 1.30, Stop loss 1.29, target 1.31. Trade will be close with profit if reach 1.31 and with a loss if touch 1.29.

SELL EURUSD at 1.30, Stop loss 1.31, target 1.29. Trade will be close with profit if reach 1.29 and with a loss if touch 1.31.

When close price reach stop-loss that is not always losing trade. Sometimes, traders move stop-loss orders when the trade is in profit, and stop loss and target bring profit for the trader.

Stop-loss order winning trade example:

Example:

BUY EURUSD at 1.3. SL in forex is 1.29. Target 1.31. When the price is 1.305 traders can move the stop loss to be 1.302. If the trade doesn’t reach the target then the trader will make a profit of 20 pips (trade reaches stop loss 1.302).

Importance of stop-loss

It goes without saying that currency prices fluctuate every day if not every minute. Forex trading is seldom the full-time job of every trader and investor. Since it is impossible for traders to stay hooked to the market at every time, a stop-loss order will mitigate the trader’s loss by informing their broker that they must sell the securities before the prices go any further down. You can decide where to put a stop-loss order after analyzing your risk-taking capacity. This feature is available to both long and short position holders.

The importance of stop loss for trading is high, based on much scientific research, experiments, and traders’ practical experience. A well-developed exit strategy, well-defined stop-loss, is an essential part of any forex trading strategy. Market condition changes during the time, and a strong market reaction can ruin trading performance without a correctly estimated stop loss level.

Forex without stop loss

Forex no stop loss strategies are dangerous strategies based on the assumption that at some point the order will be in profit. The market can be overbought and oversold for a long period of time and traders very often lose money when they risk more than that can afford. Instruction for closing trade at some price level is mandatory to the practice of experienced traders.

This feature not only saves your tangible capital but keeps you away from emotional turmoil as well. When you know that your losses will not go beyond a manageable limit, you can make trading decisions that are not burdened or clouded. The one thing that is certain about the Forex market is its uncertainty. The market can move in any direction and there is no way that anyone can predict it with utmost surety. Even if you are keeping an eye on the fundamental and technical aspects that can affect the value of a currency, you still cannot control the market. In such an unpredictable market, a feature like stop-loss can save you from drowning in debt.

A good trading strategy followed by bad money management can still leave you in troubled waters. Novice traders often go ahead with safe currency pairings like USD/JPY and EUR/USD, but still, lose money because they don’t know how to manage money. In this situation, simply putting a stop-loss order will not suffice. You must know how to calculate a stop-loss order altered to your financial needs. This has been explained further in this article.

It is evident that a stop-loss is an important tool that facilitates trading by helping traders in managing their capital and psychology. You don’t need to get trapped in the vicious circle of worrying about the unknown. It helps many traders to remain calm and make decisions that are not tainted by fear. It will keep you level-headed, which is an important virtue for any trader or investor.

Types of Stop Losses

Static stop loss

The word ‘static’ means stationary and that is what this type is about. You can put a stop at a static price and not change or move its position until the trades hit the stop-loss price. This is an uncomplicated mechanism that even new traders can understand without any difficulty. The static stop-loss allows the traders to establish that they are looking for a minimum 1:1 risk-reward ratio.

This example will help you in understanding how to use a static stop-loss. Let’s assume that there is a swing trader in LA who wants to initiate a position during the Asian session. He is expecting that volatility during the North American or European sessions will influence his preferred trades. He is aware that he could be wrong but he does not want to give up too much equity and still wants to give his trade a chance to grow. In this case, he sets a static stop-loss of 50 pips every time that he triggers a position. He wants his take-profit to be at least equivalent to the stop distance. Thus, he sets each limit order for 50 pips. This is a 1:1 risk-reward ratio. He wanted to take more risk and accept a 1:2 risk-reward ratio, he would set the static stop at 50 pips and raise the static limit to 100 pips for each trade that he will start.

In addition to the risk-reward ratio that you are comfortable with, indicators also influence how a trader would like to use a static stop-loss. Some Forex traders put a static stop distance on a technical indicator, for example, Average True Range. This is beneficial because rather than relying on their judgments, the traders are using real market information to define their stops or limits.

Isolating the concept of pips will not give you a clear picture. One must know about the kind of market that they are trading in. In the above example, we talked about a static stop of 50 pips and a static limit of 100 pips but we don’t know the kind of market that the trader was dealing in. it could be a volatile or a quiet market. The difference is that the 50 pips are not a large move in a volatile market but they are in a quiet market. Additionally, technical indicators like pivot points, price swings, and Average True Range allow a trader to utilize recent information to better devise their risk-management strategies. Therefore, it is imperative that you consider these factors before putting a static stop-loss.

Trailing stop loss

A trailing stop-loss order is an order that is not fixed, static, during the trading period. If traders have bought a security position and the market price rises, the stop price rises by the trail amount, but if the security price falls (BUY order), the stop-loss price doesn’t change.

Trailing stop-loss orders are created to reduce risk and increase profit in the moments when live positions follow the current trend.

How to calculate stop out level

The Stop-loss level in trading usually is calculated based on previous highs and lows, important price levels. Important price levels can be previous high, previous low, Fibonacci levels, pivot points.

Usually, traders find support or resistance levels, or any important levels and then set stop loss, entry point, and target price level using those levels.

Conclusion

Stop-loss is a resourceful tool that traders can use to keep themselves from losing their capital and to manage their risks. It is not possible for anyone to stay glued to the screen and even if you can commit to it, there are various other factors that can work against you. There could be internet problems or you might not be able to reach your broker on time. It is always better to use this tool to eliminate such risks.

Yes, your trading strategy should dictate how you would employ this tool but our recommendation would be to refrain from trading without using a stop-loss, especially if you are a new trader.

MACD and Awesome Oscillator Strategy

by Fxigor

As we know from previous posts, one of the best MACD indicators for MT4 is an indicator with two lines and one histogram because this indicator visually better represents the change of the trend and enables traders to better understand the cycles of changing bullish and bearish trends. Traders can download MACD indicator MetaTrader 4 with two lines for free: 2 line MACD indicator for mt4 free download

On the other side, the awesome oscillator is a histogram trading indicator that compares the current 5 bars with the 34 bars of the wider trends, based on the Awesome oscillator formula. The Awesome Oscillator is created to detect the bearish or bullish trend.– Awesome oscillator mt4 download.

Using the combination of these two indicators, traders can use one common strategy – MACD and Awesome Oscillator Strategy.

MACD and Awesome Oscillator Strategy represents a entry position strategy where traders enter into a BUY position when a bullish MACD crossover is made and both histograms are bullish (green color) or SELL position when a bearish MACD crossover is made and both histograms are bearish (red color).

As we can see on the H1 chart for EURUSD at the moment when MACD two lines make bearish cross we have red arrow. At that moment both histograms show red downside color. This simple strategy you can combine with other price action patterns, divergence, etc.

Stop loss and target can be created using daily ATR (from half to 1 Daily ATR for an example), or using FIb. levels.

Two oscillators, such MACD and awesome oscillator, usually can be used in a situation when traders want to create additional filter, to avoid false breakout or overtrading.

Initial and Variation Margin in Trading

by Fxigor

Initial and Variation Margin in Trading we analyze when we talk about trading and current positions risks.

What initial and variation margin means in forex trading and CFD trading?

Initial Margin represents the minimum balance that traders need to have in their accounts to open a position in forex trading. Variation Margin or maintenance margin represents additional requirements, unrealized profit (or loss) on open positions or transactions.

Total Margin = Initial margin + Variation margin

Initial and variation margin in stocks and futures trading

In such cases that you hear of the term initial margin being used, the margin indicates the minimum required amount that must be in the trader’s account for the trader to be permitted to conduct stocks and futures trades. When you hear reference being made to the variation margin, a clearing member provides a margin payment presented to a clearinghouse. The payment is founded on the movements of prices regarding futures contracts possessed by the clearinghouse members.

There is the requirement for the clearinghouse members to make payments of variation margins, which are noted as being paid on the basis that is day to day or that is intraday. This is necessary to engage in the reduction of exposure to the risk of positions that carry high levels of risk, which are held by the clearinghouse. Therefore, conducting members’ requirement to pay variation margins results in the clearinghouse’s empowerment regarding maintaining the level of risk exposure overall at levels that are deemed suitable, so that orderly payments are completed for all those who engage in trading.

There is the requirement for the members of the clearinghouse to make payments of variation margins, which are noted as being paid on a basis that is day to day or that is intraday. This is necessary for the sake of engaging in the reduction of exposure to the risk of positions that carry high levels of risk, which are held by the clearinghouse. Therefore, conducting the requirement of members to pay variation margins results in the empowerment of the clearinghouse in regard to maintaining the level of risk exposure overall at levels that are deemed suitable, so that payments that are orderly are completed for all those who engage in trading.

Usage of variation margin

It is acknowledged that there is the utilization of the variation margin to increase the level of the inflow of the capital that pertains to a margin account to a margin level that has been predetermined. This process is referred to as the maintenance margin. This is a vital element to consider when conducting the calculations about the variation margin. Liquid funds are required to sustain it to allow it to be applied for use in scenarios if there is the experience of losses in the future. This provides the solidified assurance that the clearinghouse will operate smoothly and efficiently.

Variation margin and factors

It is noted that various factors come to influence the variation margin. Such factors are pointed out as the movements of the prices that are anticipated, the established conditions of the market, and the kind of asset. The perception is that the payment of the variation margin is regarded as being required in such cases that the funds held within an account for the trading decrease to a level below the funds desired for the maintenance margin. When there is the requirement to place more funds into the account, this is regarded as a margin call.

What is a clearing member?

When you hear reference being made to a clearing member, this indicates that a brokerage firm engages in conducting the fulfillment of being a member of a self-regulating organization. The brokerage firm is also required to have membership within at least one key stock exchange of the United States. It may hold more than one such membership. There is the comprehension that a primary example of a clearing member is considered a futures broker.

Variation margin and clearinghouse

It is then noted that a clearinghouse is regarded as an organization that functions as an intermediary to assure that the obligations that are outlined for a contract are honored by both parties, which take into inclusion both the buyer and the seller. Hence, the reality is that a clearinghouse may serve in a third party’s role regarding options contracts and futures contracts. Also, the clearing mouse may conduct a wide array of functions, which take into inclusion performing reports for the data of trading, operating settlements for accounts that engage in trading, performing the clearance of trades, conducting the collection of margin payments, and also engaging in the regulation of the provision of instruments that are newly purchased.

Initial and variation margin futures contract conclusion

Give some consideration to the scenario in which a trader purchases a futures contract. For this contract, the margin that is indicated is for five thousand dollars, as this is noted as the minimum amount of capital necessary for the sake of being able to conduct a trade. It is recognized that the maintenance margin may be set at an amount of four thousand dollars. This indicates that in such a case that the balance held in the account decreases to four thousand dollars, the one who is engaging in making trades is obligated to bring the account back up to five thousand dollars. This is related to the fact that the amount in the trader’s account has dropped to an amount that is classified as being not enough.

The differentiation regarding the indicated margin and the maintenance margin, which is noted as being in the amount of one thousand dollars, is recognized as being the variation margin. Therefore, the reality is that the variation margin is considered the portion of the money necessary to assure that the account possesses the minimum required amount to conduct future trades.

Stop-loss meaning

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