Your forex trading station supplied by your vendor performs usually three functions simultaneously – providing continuous details about your forex trading account, displaying the updated foreign currency exchange rates from second to second and charting them. Good traders make full use of them, managing their money as well as monitoring the direction of movement of currency pairs at any given point in time, to make good trading decisions.
Foreign currencies are traded against each other, and there are seven of them which are called majors ( US Dollar- USD, Euro- EUR, Japanese Yen – JPY, Swiss Franc – CHF, British Pound – GBP, Australian Dollar – AUD, and Canadian Dollar – CAD). Currency exchange rates are expressed as a fraction, for example, if the EUR/USD indicates 1.3500. This implies that one Euro is worth 1.3500 USD, as the first currency in a pair is the ‘base currency’ against which relative value of the two are expressed at any instance. The second currency in the pair is the quote currency, also expressed as the ‘pip currency’, and any profit or loss in a transaction that has not been realized is expressed in terms of the second. Thus -234 in the profit /loss column implies a paper loss of $ 234 at a particular instant in a mini account. A mini account is $ 1/pip.
While on one hand, the forex trading station or the forex platform keeps track of the updated exchange rates of any number of currency pairs, it also keeps track of the profits and losses on any open trade, and keeps re-calculating the margin on your account. This is always important to keep in mind, as if it falls below a critical level, your trades are automatically closed because of the lack of money.
Just make sure that there is always enough money in your trading account so that such an event does not happen. With very high leverage on your capital offered by certain vendors ( 100:1 to 400:1), even relatively small moves in an adverse direction can easily breach your margin and substantially reduce your capital.
The commonest reason why some inexperienced traders lose all their capital and stop trading is their inability to sustain major price moves in an adverse direction due to an under-capitalized account. Getting used to your trading station so that you can constantly keep track of changes in exchange rates and following the rules of your money management system is the only way to prevent this from happening to you.
Seasoned forex traders are always prepared to take a big loss if necessary, particularly in swing trading, it is possible to encounter central bank interventions, that is when the central bank of a country intervenes in an effort to reverse an extreme fall or rise in their currency. For example Japan’s central bank may intervene if the Yen falls too much or rises too much and too soon, the intervention cannot change the trend! It will only cause a temporary, short lived, sharp reversal, maybe lasting 2 – 3 days, but it is so sharp that you can see 800 pip movement in two days, and the unprepared swing trader may lose their entire account if they are trading big size on large stops. There’s no reason for that, just be suspicious when a currency pair appears extreme levels, maybe multi-year highs or lows, and expect that the typical intervention for most pairs is 600-800 pips of sudden counter trend action, followed by a recovery in the coming days.