Leverage And Margin Call In Forex Trading

October 20th, 2014

What is leverage?

Leverage And Margin Call In Forex Trading

Leverage And Margin Call In Forex Trading

If you are not familiar with leverage you might be wondering how small investor can contribute such large
amounts of money as stated in lot sizes. Assume your broker as a bank who gives you, $100,000 to buy and sell
currencies and requires only a good faith deposit (margin) of $1,000. This is how leverage works it let you
control large contract sizes with small good faith deposit (margin) to amplify your profits.

The amount of leverage provided varies from brokers to brokers.
Once you have funded you account to trade the broker will let you know how much they require per contract
traded.
For instance every 1,000 that you put in margin allow you to trade 1 standard lot of 100,000.
As previous stated the leverage which directly affects the minimum security (margin) vary from broker to
broker. So a broker that require 1% margin means that for every $100,000 traded the broker will put $1,000 as
a security deposit (margin) on the position.

What is margin Call?

If in case your account equity drops below margin requirement (usable margin) due to loss on open positions
your broker will close open positions. This will help prevent your account going into negative balance.

Example #1

Let’s assume you open an online Forex trading with a deposit of $2,000. You place a trade of 1 standard lot size
on EUR/USD, which on this instance requires a $1,000 in margin. Since you started trading with $2,000 and
$1000 was kept a side as a margin requirement for the open trade. Then the remaining usable margin will be
$1,000, this means any losses will be deducted from your usable margin. If your losses exceeds you usable
margin which in this case is $1,000 you will automatically get a margin call and all open positions will be
closed.

How To Calculate Profits And Losses In Forex Trading

October 20th, 2014
How To Calculate Profits And Losses In Forex Trading

How To Calculate Profits And Losses In Forex Trading

This topic will cover trivial mathematics to help you calculate profits and losses. You will also learn what is pip
and lots.

What is a Pip?

Pip is the most common unit and the smallest possible increment in the value of currency pair. If the value of
EUR/USD changes from 1.2250 to 1.2251, this means a 1 pip appreciation in the value of EUR/USD. The last
decimal place of a quotation is called pip. It also helps to indentify your profits or loss.
Each currency has its own value, which makes it is mandatory to compute the value of a pip for that particular
currency. In currencies pairs where the USD (United States Dollar) is the base currency (or quoted first) the
calculation would be as follows.
Let’s assume USD/JPY current rate is at 119.80 (note USD/JPY currency pair only have two decimal places,
whereas most of the other pairs have four decimal places)
In the case of USD/JPY, 1 pip would represent 00.01
Therefore,

USD/JPY:  
119.80
.01 divided by exchange rate = pip value
.01 / 119.80 = 0.0000834
This looks like a very long number but later we will discuss lot size.
USD/CHF:
1.5250
.0001 divided by exchange rate = pip value
.0001 / 1.5250 = 0.0000655
USD/CAD:
1.4890
.0001 divided by exchange rate = pip value
.0001 / 1.4890 = 0.00006715
In the case where the US Dollar is not quoted first and we want to get the US Dollar value, we have to add one
more step.
EUR/USD:  

1.2200
.0001 divided by exchange rate = pip value
so
.0001 / 1.2200 = EUR 0.00008196
but we need to get back to US dollars so we add another calculation which is
EUR x Exchange rate
So
0.00008196 x 1.2200 = 0.00009999
When rounded up it would be 0.0001

GBP/USD:
1.7975

.0001 divided by exchange rate = pip value
So
.0001 / 1.7975 = GBP 0.0000556
But we need to get back to US dollars so we add another calculation which is
GBP x Exchange rate
So
0.0000556 x 1.7975 = 0.0000998
When rounded up it would be 0.0001
You might be bit overwhelmed but this is put to only explain how to calculate pip value. Almost all brokers will
do all this tedious calculation automatically. However it is good to know how it works.
In the next section, we will discuss how these seemingly insignificant amounts can add up.

What is Lot?

Spot Forex transaction is in lots. Lots are the number of unit of base currency that you buy or sell. The standard
lot size is 100,000; the mini lot size is 10,000 whereas micro lot size is 1,000. As previously explained the
smallest increment of that currency that could be measure is known as Pip. Forex trader trade large amounts of
any picky currency so that the smallest increment could produce significant profit or loss.
Let’s suppose we will be trading standard 100,000 lot size. We will now recalculate some of the above example
to check how it influences the pip value.

USD/JPY at an exchange rate of 119.90
(.01 / 119.80) x $100,000 = $8.34 per pip
USD/CHF at an exchange rate of 1.4555
(.0001 / 1.4555) x $100,000 = $6.87 per pip
In cases where the United States Dollar is not base currency (quoted first), the formula will be is slightly
different.
EUR/USD at an exchange rate of 1.1930
(.0001 / 1.1930) X EUR 100,000 = EUR 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip
GBP/USD at an exchange rate or 1.8040
(.0001 / 1.8040) x GBP 100,000 = 5.54 x 1.8040 = 9.99416 rounded up will be $10 per pip.

How to calculate Profi t And Losses?

Let take an example in which we buy United Stated Dollar (USD) and Sell Swiss Francs (CHF).
The rate of the pair will quoted like 1.4525 / 1.4530. As we will be buying United States dollar we will be
working on the 1.4530 which in fact is the rate at which other traders are prepared to sell.
Let say, you buy 1 standard of 100,000 lot size at 1.4530.
After some time the price moves from 1.4530 to 1.4550 and then you decide to close the trade.
Therefore the new quote for the USD/CHF will be 1.4550 / 1.455. As now you are closing the trade which
means you will now sell in order to close the trade therefore you will take the second 1.4550 price. Which is the
price other traders are prepared to buy at.
The difference between 1.4530 and 1.4550 is .0020 or 20 pips.
Using the formula from before, we have (.0001/1.4550) x $100,000 = $6.87 per pip x 20 pips = $137.40
Note, when you place a trade you are subject to spread which is the bid / offer price.
You will open a buy trade based on offer price and when you place sell trade it would be based on bid price.
To summarize   when you buy to enter a trade you pay the spread but not when you exit the trade. Same is true
with sell, when you sell to enter a trade you pay the spread but not when the sell trade is closed.

How To Make Money Trading Forex

October 20th, 2014

HOW TO MAKE MONEY TRADING FOREX

HOW TO MAKE MONEY TRADING FOREX

HOW TO MAKE MONEY TRADING FOREX

Forex trading consists of simultaneously buying and selling of currencies. It is very simple process to place a
trade in Forex market. The logistics and mechanics of Forex trading is very similar to other market (like stock
market), therefore if you have prior experience in trading then this should be very simple for you to
understand.
Forex trading revolves around exchange of one currency for another. So if you anticipate that the value of one
currency might increase so you buy that currency and sell the other

 

Following is the example how you make money trading EURO

How To Make Money Trading Forex

Ratio of a currency value against another is a simple ratio called exchange rate. For illustration, EUR/USD
exchange rate specify how many EURO can purchase one U.S. Dollar. In other words, how many EURO will be
required to buy one U.S. Dollar.

How to Read an forex Quote

Currencies are quoted in pairs, such as EUR/UDD, GBP/USD or JPY/USD. As stated earlier every foreign
exchange transaction consists of simultaneously buying of one currency and selling of another that is why they
are quoted in pairs. Following is an example of a foreign exchange rate and how transaction works for the
Great Britain pound versus the United States Dollar:

GBP/USD = 1.7500

The first currency stated in known as the base currency (in this example it is GBP for Great British Pound)
whereas the one on the right is called the counter or quote currency. (in this example it is USD for United States
Dollar).
The exchange rate denotes how many in terms of units of the quote currency should be paid to purchase one
unit of the base currency. For this example and the rate shown you would have to pay exactly 1.7500 United
Stated Dollar to buy 1 GBP.

Where as in case of selling the exchange rate denote how many in terms of unit of the quote currency you will
get for selling out the base currency. So in this example if you sell 1 GBP you will get 1.7500 USD.
As it name implies the base currency is the “Basis” of the transaction buy or sell. This simply means that you
buy the base currency and concurrently sell the quote currency.
If you anticipate that the base currencies will strength against the counter currency you will open a buy trade.
In opposite manner you will place a sell trade if you believe that the base currency will weaken against the
quote currency.

The Structure Of Forex Market

October 20th, 2014

Forex Exchange Rates

The Structure Of Forex Market

The Structure Of Forex Market

Generally, exchange rate of currencies are determined by the health of that’s country’s economy in association
to the other countries’ economies.
FX Spot market does not have a physical location neither a central exchange.  It is considered an Over The
Counter (OTC) or Interbank market, because the trades are executed electronically, within a network of banks,
constantly over a 24-hour period which is not the case in other financial markets including the New York Stock
Exchange.
Numerous firms enable traders like us ‘retail trader’ to trade Forex market.  The pre-requisites of Forex trading
are trivial and only require a computer, a high-speed Internet connection, and the information contained
within this eBook.

The Forex market (OTC)

In the OTC market orders are cleared or processed on a central exchange but are routed between different
participant who they want to trade with depending on the attractiveness of quotes, trading conditions and
reputation of the trading counterpart.
The United States dollar is the most actively traded currency, with a share of 89% of all transactions. Whereas,
Euro is the second most actively traded currency at around 37% and Japanese Yen at 20%.

Why Trade Foreign Currencies?

There are numerous benefits and advantages of trading Forex. Follow are just a list of few pros of trading Forex
and are paramount reason why so many people are choosing this market.
No commissions. There are no fees included with trades made on Forex exchange including any of the
following clearing fees, exchange fees, government fees, and brokerage fees.  However Brokers are remunerated
for their services through bid-ask spread which we will discuss later.
No middlemen. Spot Forex trading is an OTC market which eliminates the need for middlemen and allows you
to trade directly with the market responsible for the pricing on a particular currency pair.
No fixed lot size. Spot Forex offers very flexible contract or lots size. You can determine your own contract size
and can start trading with a minimum of $250 and in some cases with even less.
Low transaction costs. The transaction cost which is the bid/ask spread is trivial and is typically under 0.1
percent. Larger dealer offers even more attractive transaction cost. However the spread vary from currency
pairs, brokers and market conditions.
A 24-hour market.  Forex market is open 24 hours with different financial centre, banks, individuals and
institutions exchanging currencies 24 hours a day excluding slight gaps on the weekends. Forex enables you to
choose when you want to trade, either in morning, noon or night.

No one can corner the market. Unlike stock exchange and other financial market foreign exchange market
has great volume with innumerous participants and there is no single entity including the center banks of
developed countries that can control the market price for a elongated period.
Leverage. I  A small amount could be set as margin to control larger contract value. Leverage provides trader
the ability to maximize their gains, and at the same time maintain risk capital to a lowest amount. For instance,
a broker that offers 400:1 leverage means that $50 margin funds would enable a trader’s control full standard
lot that is to buy or sell $100,000 worth of currencies.
High Liquidity. B  Forex market is enormous and extremely liquid financial market.  Your order is
instantaneously executed with only a simple click of the mouse under normal market conditions.
Free “Demo” Accounts, News, Charts, and Analysis. Most online Forex brokers offer tons of value added
services including ‘demo’ accounts to practice trading as well as real-time market new along with breaking
Forex news and charting services.
“Mini” and “Micro” Trading:  Online Forex brokers offer “mini” and “micro” lot sizes or trading accounts.
Accounts can be opened instantly with a minimum deposit of $200 or even less.

What is FOREX?

October 20th, 2014

What is FOREX?

what is forex

what is forex

The (FX) Foreign Exchange market is the world largest financial market, with a volume of above $4 trillion a
day. Forex trading consists of buying of one currency and simultaneous selling of other. The volume and
liquidity provided by the Forex market surpasses aggregated trading volume of all worlds’ stock markets
including $25 billion a day volume that New York Stock Exchange trades, this manifest how enormous the
Foreign Exchange really is.
What is traded on the Foreign Exchange market?
Forex trading consists simultaneous buying of one currency and the selling of other. In Forex trading traders
open an account with a FX broker or dealer which facilitates the buying and selling of Currencies, and they
traded in pairs; for instance the Euro and the US dollar (EUR/USD) or the Great Britain Pound and the US
Dollar (GBP/USD).
Assume that buy of a currency as purchasing a share in that respective country. For instance, when we buy
Great Britain Pound we are in effect purchasing a share in the Britain economy. The value of currency is an
undeviating reflection of what the market believes about the present and upcoming health of the economy.

 

Which Currencies Are Traded?

Some of the most admired currencies which are of mainly developed economies are listed below with their
symbols:

forex expert

When Can Currencies Be Traded?

The spot FX market is truly dissimilar from all the financial markets around the globe. Different financial
centre, banks, individuals and institutions exchange currencies 24 hours a day excluding slight gaps on the
weekends.
Time Zone      New York      GMT
Tokyo Open    7:00 pm        0:00
Tokyo Close    4:00 am         9:00
London Open    3:00 am      8:00
London Close    12:00 pm     17:00
New York Open    8:00 am   13:00
New York Close    5:00 pm   22:00