Margin trading is the term used when trading forex with borrowed capital. That is how you open $10,000 or $ 100,000 worth positions with only $50 or $1000 in your trading account. You can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital.
There is a minimum amount of currency that we have to buy in order to open a position in foreign currency trading market. In forex terminology we call this minimum amount, a "lot". When you go to the super market you cannot just buy a biscuit. You will have to buy a whole packet. It does not make any sense to buy 1 Yen.
That is why they come in lots.
Carefully read the following example to understand the concept behind this.
- You believe that signals in the market are indicating that Euro will go up against the US dollar. You open one lot (100,000), buying with the Euro at 1% margin and wait for the exchange rate to climb.
- When you buy one lot (100,000) of EUR/USD at a price of 1.4000, you are buying 100,000 pounds, which is worth US$140,000 (100,000 units of Euro * 1.40 (exchange rate with USD).
- If the margin requirement was 1%, then US$1400 would be set aside in your account to open up the trade (US$140,000 * 1%). You now control 100,000 Euros with US$1500. Your predictions come true and you decide to sell.
- You close the position at 1.5000. You earn 100 pips or about $1000. (A pip is the smallest price movement available in a currency).
- When you close the position, the original amount you deposited as the margin requirement is returned to your account with necessary adjustments for the profits/ losses you made.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment