Forex and Money Market

Options are another way of making money in the Forex trading business. It’s a vast subject, so today we’ll just talk about using “safety” puts. Simply explained, a put is an option with 3 different parts. The first entails a contract. When you purchase a put, you’re acquiring the right to sell currency at a pre-set price and at a certain date. You could for instance purchase a put and sell one lot prior to the date established in the agreement. The price you’ve predetermined is known as a “strike.” Let’s assume you buy a Euro put and believe it will increase to $1.3400. If the price drops to $1.3390 you can still sell the lot and earn a profit. By hedging the forecasted price, you’ll protect yourself.

The second part of a put is the time element. Options usually have set monthly dates. So you may buy one that runs out by the end of next month or in ten months.

Lastly, Options are not free; you pay a “premium.” And the more valuable, the higher the premium.

One of the advantages of choosing the longer term Options is that you don’t have to worry about setting a stop. With the use of a “protective put” you can let the currency fall to zero and still be in the position averting danger of incurring huge losses. A protective put let’s you hedge in the event of a shift in trend; it’s like having added insurance for your trades.

If you use technical analysis when trading the foreign currency market, recognizing double bottoms can be an excellent tool for opening and exiting your trade. A double bottom is a chart pattern that reflects a drop in prices. There’s usually a mild reversal soon after the first decrease; and then another sudden fall. The monetary unit drops to the same level or very close to the initial one. To easily identify it on your chart, look for something that looks like a W.

Its counterpart is the double top, and reflects a sudden hike in price; it’s followed by a mild correction and then another increase in rate. So let’s say you’re looking at the EUR/USD and it drops to $1.3250. It corrects itself to $1.3270 but drops again to $1.3249; you’ll see a double bottom in your graphics.

Both indicators are ideal for assessing trend reversals. The example above reveals the currency’s support levels and these are often indicative of an upcoming change in direction. Trading in currency can be quite risky unless you have a way of predicting with certainty the moves that the market will make.

Resistance rates are found at the top, and are usually those farthest from each other in the “W”. When choosing an entry into a position, wait for the second high price. Once the currency breaks through such price, you’ll normally have confirmation of a trend reversal. Check out a few tips for using breakouts and you’ll increase profits.