Leverage and Margin

In my fist post I've said that you can trade as little as $300. and that you can make a fortune out of it...did I say through some strategy? Well, I didn't actually said that, but said just hang on and you'll learn the strategy on trading that amount in Forex. So, here we go.

In the previous post I made mention about a pip. To refresh, in the Forex market, prices are quoted in pips. Pip stands for "percentage in point" and is the fourth decimal point, which is 1/100th of 1%. Numerically, this is 0.0001 and is less than a cent, monetarily.

How do you make 1 pip equal 1 US dollar? Simple, trade in volume of $10,000! But, I don't have that amount, now what?

Open a "Mini" Account (a small Margin Account).

You are probably wondering how a small investor like yourself can trade such large amounts of money.

Think of your broker as a bank who basically fronts you $10,000 to buy currencies and all he asks from you is that you put in $300 as a good faith deposit, which he will hold you for but not necessarily keep.

Sounds too good to be true? Well this is how forex trading using leverage works.

The amount of leverage you use will depend on your broker and what you feel comfortable with.

Typically the broker will require a minimum account size, also known as account margin or initial margin.

Once you have deposited your US$ 300, the online Broker will lend you up to 200 times that amount. OPERATIVE WORD = LEND

The Margin Account is also known as trading with Leverage, in this case a leverage of 200:1

So, once you open a $300 "Mini" Account, the broker will lend you up to $60,000 and you will then be able to trade. Simply put, the broker will lend you $200 for every $1 of margin that you put in. When you trade, you have to trade in increments of $10,000. This increment is called a "Mini" Lot. If you have $60,000 that is equivalent to 6 "mini" lots.

For example, for every $50 you have, you can trade 1 "mini" lot of $10,000.

Since you have $300 they may allow you to trade up to $60,000 of Forex.

The minimum security (margin) for each lot will vary from broker to broker.

In the example above, the broker required a one percent margin. This means that for every $10,000 traded, the broker wants $50 as a deposit on the position.

Leverage allows traders to borrow money and use that money to invest in the foreign exchange market.

Because of leverage, clients without a huge amount of capital are able to make large investments, whereas in other markets such as the equities market, clients would have to pay 50% of the full amount for each share of stock they were investing in.

Most market makers allow positions to be leveraged up to 100:1. This means that if a trader wanted to buy a “lot” worth $100,000, with 100:1 leverage the trader only has to put up $1,000.

Leverage is about risk. Increasing your leverage increases both your opportunity to take bigger profits AND rack up bigger losses.

It’s easy to see in this graph that the amount of margin required in taking positions in the currencies market is much less than in the equities and futures markets.

Source: forexroom.wordpress.com

To be continued...

Understanding Forex Quotes

Reading a foreign exchange quote may seem a bit confusing at first. However, it's really quite simple if you remember two things: 1) The first currency listed first is the base currency and 2) the value of the base currency is always 1.

The US dollar is the centerpiece of the Forex market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 110.01 means that one U.S. dollar is equal to 110.01 Japanese yen.

	What is a pip? In the Forex market, prices are quoted in pips. Pip stands for "percentage in point" and is the fourth decimal point, which is 1/100th of 1%. In EUR/USD, a 3 pip spread is quoted as 1.2500/1.2503 Among the major currencies, the only exception to that rule is the Japanese yen. In USD/JPY, the quotation is only taken out to two decimal points (i.e. to 1/100 th of yen, as opposed to 1/1000th with other major currencies). In USD/JPY, a 3 pip spread is quoted as 114.05/114.08

When the U.S. dollar is the base unit and
a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 113.01, the dollar is stronger because it will now buy more yen than before.

The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.7366, meaning that one British pound equals 1.7366 U.S. dollars.

In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.

In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.

Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.

When trading forex you will often see a two-sided quote, consisting of a 'bid' and 'ask':

The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency).
The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).

Source: Forex.com

To be continued...

Intro to the Market

What's Forex?

"Forex" stands for foreign exchange; it's also known as FX. In a forex trade, you buy one currency while simultaneously selling another - that is, you're exchanging the sold currency for the one you're buying. The foreign exchange market is an over-the-counter market.

Currencies trade in pairs, like the Euro-US Dollar (EUR/USD) or US Dollar / Japanese Yen (USD/JPY). Unlike stocks or futures, there's no centralized exchange for forex. All transactions happen via phone or electronic network.

Who trades currencies, and why?

Daily turnover in the world's currencies comes from two sources:

* Foreign trade (5%). Companies buy and sell products in foreign countries, plus convert profits from foreign sales into domestic currency.

* Speculation for profit (95%).

Most traders focus on the biggest, most liquid currency pairs. "The Majors" include US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and Australian Dollar. In fact, more than 85% of daily forex trading happens in the major currency pairs.

The world's most traded market, trading 24 hours a day

With average daily turnover of US$3.2 trillion, forex is the most traded market in the world. A true 24-hour market from Sunday 5 PM ET to Friday 5 PM ET, forex trading begins in Sydney, and moves around the globe as the business day begins, first to Tokyo, London, and New York.

Unlike other financial markets, investors can respond immediately to currency fluctuations, whenever they occur - day or night.

Source: Forex.com

To be continued...

Basic Concept of Trading on the Forex

What is Forex anyway?

Forex (Short Form of Foreign Exchange) is a financial market where traders can trade (buy or sell) foreign currency. For a beginner trading in Forex is a lot complicated. You need to understand a lot of terminologies, procedures, tricks and strategies. But, Forex trading is a very exciting world owing to its immense size, unpredictability and timings as the markets runs straight from 5 pm EST Sunday to 5 pm EST Friday straight. Trades can be made instantaneously and decisions to buy and sell are being made all the time.

The Basics

If you believe value of a market instrument is going to increase, then you would buy the instrument and at one point in the future you would sell it for a higher price. Simple!

Your goal in trading is to buy at a lower price and sell afterwards for a higher price. The basic article being traded here is money. Yes, MONEY! The Forex has a daily trading of $3.2 trillion. The New York Stock Exchange doesn't even trade a quarter of a trillion per day. That's how huge it is. It is a huge and most popular market for speculation owing to its huge size, liquidity and the fact that currencies follow trends!

Then, the Forex is open 24 hours a day, right from 5 pm EST Sunday to 5 pm EST Friday, so you can trade anytime, from anywhere and whenever you feel like!

Finally, trading currencies in Forex is both risky and profitable. It is risky if you DON'T educate yourself with the necessary knowledge required to be a Forex Trader. It is profitable if you educate yourself and commit yourself to continuously learning the trade.

To be continued...