what is difference between new position and break out in fx parlance?
Question by Ankur: what is difference between new position and break out in fx parlance?
here is what break out is…
Suppose that a currency pair is rallying toward a breakout. Based on your analysis, you believe that once it reaches this point it will breakout and advance higher. In this case you would place a stop buy order above the breakout point so that you can trade the rising price and open your long position. A stop order can also be used to trade a downside breakout. In this case you would place a stop order below the support level so you can trade the lower price and open your short position.
now isnt it same as new position??
Best answer:
Answer by David
You forgot one major issue, the Stop Loss Order, which leads you to risk, which helps you calculate your risk/reward ratio before entering a bad trade. You don’t EVER enter a leveraged position without a Stop. Placing the Stop correctly is an art in itself, and most beginners place it too close to keep from losing much money (weak hands). In fact, just placing a Stop increases the chance of a loss considerably.
There’s several things you’re not considering, or probably don’t understand, which is why you should read a book or ten before entering the world of “trading.” A trader does things differently than an investor with a Trade Plan and good money management and good “trading” strategies, and of course Stop Orders and triggers and targets. Unfortunately, an investor rarely has a Plan either.
A trader has several “a priori” before placing a trade. First of the firsts, there must be good liquidity. The others are leverage and risk. Some say “risk” is the first of the firsts things that should be considered before entering a trade. You have ignored this one, the very one that can do the most damage to your account when placing a Market Order (MO) in a possibly fast market situation (a breakout). Did you know that a Stop Entry Order becomes a MO when executed? Do you know the definition of a MO?
“you may end up paying a whole lot more than you originally anticipated!”
Read more: http://www.investopedia.com/terms/m/marketorder.asp#ixzz21HvOZMZc
What they don’t really say is that a MO can be executed at ANY price. How do you measure your risk for that?
Second, your MO, which executed at a horrible price, is now the furthest away from the breakout price, or more importantly, the low of the breakout range, which is where you would have to put your Stop Loss Order. For the trade to prove you wrong, the Low would have to be violated, so your Stop is a LONG way from your Entry, meaning HUGE risk. If you really want to play with the experts, you really have to know what you’re doing with this one, or they’ll only give you two or maybe three chances and you’ll be done, wiped out, cryin’. False breakouts are notorious for wide swings and big losses. It’s called a whipsaw, and they’ll make you puke. You’re just asking for it.
You should read the books, develop a Plan, and test your Plan on a simulator for several months. If you can’t make “play” money then you certainly can’t make real money, in which case you need to revise your Plan. Look for low risk trades. High risk created by you, and the high risk of leverage are the two biggest killers of a trader.
If there’s something specific you don’t understand, after FIRST having done the work to define your terms and apply them, then we can help. But we cannot teach you to be a “trader” in this little box any more than we can teach you to be an engineer. Trading is a vocation. If you want to compete with the experts, you have to know something first, and not just how to place a trade.
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