Often there are major news scheduled on the economic calendar which cause big volatility on the markets.
For example there are new early elections scheduled in Turkey on sunday 1st of november. When the market opens on Monday, USD/TRY (or EUR/TRY) could start with a big gap higher or lower. If the ruling Development and Justice Party (Erdogan’s AKP) will win these elections convincingly, this might be bullish on the TRY (Turkish Lira).
Lets say I have two accounts on my market maker broker Plus500. On each of them I deposit 1000 euro.
On one account I go long and on the other I go short on the USD/TRY pair. I open both positions about 15 minutes prior to the close of the market on Friday 30 october (the last trading day prior to the elections) so that I have a real small chance of getting kicked out of a trade by whipsaws.
Since Plus500 works with a leverage of about 1:200, even a 1% gap higher or lower will result into a profit of 200%. So on one of the accounts, lets say on the one I went long on the USD/TRY I will make 2000 profit, and on the other account on which I went short I might lose the whole 1000 deposit, I can not lose more than the money I deposit. So I will lose 1000 euro on one account, but will make 2000 profit on the other account and at the end I will have 3000 euros.
What will or can my broker, which is actually not a broker but a market maker (not an ECN), what can they do in order to kick me out of a trade so that they dont lose money?
The warnings on Forex trading regularly state that you can lose more than you deposit so don’t assume that you can’t lose more. The last thing that you want is to be reckless & have your broker chasing you for $1,000.
What you are talking about here is Hedging, you may want to google it & look in to it more. And even with taking both sides of the trade, it’s not to say that you’ll be profitable. Imagine that price surges upwards by 75-pips so you think, it’s a bullish move, you cut your losses with the other position & then price retraces back down, you’re now losing money. It’s not as easy as you think.
As per agreement my broker says that I can not lose more money than I have on my account. They are responsible if it occurs that they will not be able to close my account on the margin call.
Its indeed not realy easy when price heads upwards and then prices retraces back, but when some major news happens in the weekend, like the results of the election, price can open with a big gap upwards or downwards, one of my account would make profit. The only probleem i think would be if prices don’t open with a GAP big enough
If your broker allows options trading a straddle is a good way to play big movements when you don’t know what the direction will be. You buy a put below the current price and a call above the current price. One of them will expire worthless but hopefully the profit on the other one is big enough to cover those losses and make a profit overall. The bigger the move the more profit
I can’t post a link to more info because I’ve only just joined, but look it up
Are you prepared to lose the whole £2000? If the price moves against one leg of the setup to the point that it causes the dealer to liquidate that account and then against the other leg to the point of liquidating that account you will lose the whole £2000.
What is the profitable exit strategy for this setup? If one account closes and the other is just a few pips into profit on this setup will you close the other leg immediately or try to let it go on? Will you groom your stop or use a target? You realize you could be risking £2000 to make just £20 don’t you?