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...
2 comments:
Is it possible also to trade forex with as little as $100? Thanks!
Yes, of course. As long as you know how to trade. Usually traders go for 100:1 leverage, the margin depends on the lot you wish to gamble. As an advice only trade 2 to 3% of your total equity to trade. Don't trade a sum that you cannot afford to lose --->this is a basic rule. Therefore a wise step for trading is to trade only reasonable amount.
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