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Introduction to Forex Margin

Introduction to Forex Margin The spot market, which accounts for nearly one-third of global foreign exchange cashback forex volume, can be divided into two levels overall: the interbank market, where currencies are bought forexbonusrebate sold for delivery and settlement over two days, with banks acting as wholesalers or market makers the retail market cons forex discount brokersting of private traders, where traders trade over the telephone or Internet through intermediaries (brokers) The Forex market has no centralized trading The foreign exchange market is a truly global market that operates 24 hours a day from Monday to Friday, with daily trading starting in Wellington, New Zealand, and moving in sequence with the sun to Sydney, Tokyo, Hong Kong, Singapore, Bahrain, Frankfurt, Geneva, Zurich, Paris, London, New York, Chicago, Los Angeles, and then starting all over again. Then it starts all over again Each foreign exchange transaction is traded between a pair of currencies Each forexdiscountbrokers is marked by a unique 3-letter International Standards Organization (ISO) code, e.g. GBP for British Pound, USD for US Dollar The currency pair is represented by two ISO codes plus a separator, e.g. GBP/USD, where the first code represents the base currency and the other is the secondary currency The exchange rate In short, it is a currency denominated in one currency for another e.g. GBP/USD = forexrebatesbrokers.5545 means that one unit of GBP (base currency) can be exchanged for 1.5545 USD (secondary currency) Traders buy and sell in the base currency and beginners often get confused with this basic concept The exchange rate is usually expressed in four decimal places, only the Japanese yen is expressed in two decimal places The first two of the four decimal places are large numbers, while the For example, in GBP/USD=1.5545, the large number is 1.55, while the third and fourth decimal places, 45, represent the points. The difference between the bid price and the ask price is called the spread. 1.5545/50 means that the buyers bid for 1GBP is 1.5545USD and the sellers ask price is 1.5550USD, where the spread is 5 pips. USD/JPY is USD/JPY USD/CHF is USD/CHF Cross rates Non-USD currency pairs are called crosses We can derive cross rates for GBP, EUR, JPY and CHF from the above major pairs All exchange rate movements between currencies must be coordinated, otherwise round-trip trades and zero-risk profits are possible Buying is selling Every time you buy the base currency you are selling the secondary currency accordingly Similarly, selling the base currency means buying the secondary currency at the same time For example, when a trader sells 1GBP, he also buys 1.5545USD Similarly, when a trader buys 1GBP, he also sells 1.5550USD To explain this equivalence, we can convert the GBP/USD rate and swap the buyers bid and sellers ask accordingly to arrive at the USD/GBP rate /USD/GBP = (1/1.5550) buyers bid; (1/1.5545) sellers ask = 0.6431/33 This means that the buyers bid for 1USD is 0.6431GBP (or 64.31 pips) and the sellers ask for 1USD is 0.6433GBP (or 64.33 pips) Note that at this point the USD becomes the base currency and the difference is 2 pips. The difference is 2 pips Buy and sell basic trading unit-lots As mentioned above, each foreign exchange transaction is to exchange one currency for another currency foreign exchange margin investors basic trading unit is called lot, consisting of 100,000 units of base currency (but some brokers can arrange to do so in mini-lot trading, with 10,000 yuan as the basic unit of trading) Buy a lot of GBP/USD that is at Similarly, selling a lot of GBP/USD means selling 100,000 pounds at 1.5847 pounds to 1.5847 dollars, for a margin of 158,470 dollars. The buyer of the 158,520 USD mentioned in the example above can simply open a margin account to reach the size of the transaction. Since selling one currency means buying another at the same time, a trader who sells a single GBP/USD is actually buying a certain amount of USD, and therefore must also put up a margin corresponding to the value of the transaction (158,470 USD). 1%-5% of the potential value of the currency depending on the investors trading broker If you trade through a U.S. broker, then you may have to open a U.S. dollar margin account, even if you are a UK resident Assuming your margin account is $5,000 and the margin requirement is 2.5%, you can establish a position worth $200,000 The value of your position is constantly being evaluated, and if the margin If the money in your account falls below the minimum required to support your open position, you may be asked to add money to your account This is known as a margin call If you are trading in a currency other than that accepted by your broker, you must convert your profit and loss to an acceptable currency For example, assuming you are trading USD/JPY, your profit and loss will be marked in Japanese Yen If your brokers local currency is USD, then your profit and loss When you buy a currency you are going long on that currency and the long position is opened at the sellers asking price. Because of the symmetrical nature of currency trading, you are long one currency and short the other, for example, if you trade £100,000 for dollars, you are short the pound and long the dollar. To close a position means to make a reciprocal trade in the same currency pair For example, if you are already long a single GBP/USD at the sellers asking price, to close the position you are short a single GBP/USD at the buyers bid You must start and close the trade through the same intermediary, you cannot open a single GBP/USD position with broker A You cannot open a GBP/USD position with broker A and close it with broker B. Example of operation Bullish Assume the current GPB/USD rate is 1.5847/52 You expect the pound to appreciate against the dollar, so you buy a single order of 100,000 pounds at the sellers asking price of 1 pound to $1.5852 The contract value is 100,000 X $1.5852 = $158,520 The brokers margin requirement for the dollar is 2.5%. The USD margin requirement is 2.5%, so you must ensure that you have at least 2.5% X $158,520USD = $3,963USD in your margin account GBP/USD really appreciates to 1.6000/05, you then decide to close the position by selling GBP at the buyers bid rate and buying back USD as follows: 100,000 X ( 1.6000-1.5852)USD = 1,480USD, which is equivalent to a $10 profit per pip. Your return would be 1,480/3,963 = 37.35%, which shows the positive effect of buying on a margin account. If GBP/USD falls to 1.5700/75, your loss would be as follows: 100,000X(1.5852-1.5700)USD = 1.5700)USD = 1,520USD, a loss of 38.35% This example shows us that trading on margin can magnify your profit or loss ratio, 470USD, you actually sold 100,000 GBP and bought 158,470USD Your brokers required USD margin is 2.5% X 158,470USD = 3,961.75USD GBP/USD falls to 1.5555/60, so your book gain is as follows: 100,000X(1.5847-1.5560USD) = 2,870USD The book gain of 2,870USD is added to your margin account and you now have 6,831.75USD so you can open a position worth 273,270USD But if GBP/USD starts to rise, when the rate reaches 1.6000/05, your book loss will be as follows: 100,000X(1.6005- 1.5847)USD = 1,580USD Your margin account is reduced by 1,580USD to 2,381.75USD, which can only support an open position worth 2.381.75USD/0.025=95,270USD and the amount you need to trade is: 100,000X1.6005USD=160.050USD, USD will send you a margin call to cover 2.5% X 64,780 USD = 1,619.50 USD. If you do not renew this amount immediately, the broker will liquidate your position and the exchange rate when you liquidate your position will be GBP/USD = 1.5720/25. USD=1.5720/25 and your profit is as follows: 100,000X(1.5847-1.5725)USD=1,220USD Now that you have no more open positions, you can withdraw the entire $5,181.75 in your trading account in cash or you will have enough margin to support a position worth 207,270USD.  Forex trading is risky, and as we have seen, trading on margin can greatly magnify profit or loss margins Forex trading requires constant vigilance, and traders need to sacrifice rest or leisure time Orders that are executed immediately at the current rate are called market orders, but traders can set up some automatic orders at predetermined levels to control losses and consolidate gains Stop orders (STOP): These are orders that are placed when If you have a long position, you can set up a stop order below the current rate. Once the market price falls below the stop loss trigger level, the order will be activated and your long position will be closed automatically. This strategy is useful for locking in profits as positions become more profitable. By raising the stop loss trigger level, traders can ensure that they can still realize most of their book gains if the market reverses to the downside. The problem with stop loss orders is that in volatile markets, rates can break through the stop loss trigger level, making it impossible to execute stop loss orders at the exact stop loss level. TPO: as opposed to a stop-loss order (i.e., limit gain) TPO means that once the current rate crosses a set limit, the position will be closed For short positions, TPO orders will be placed below the current rate, and for long positions, vice versa Limit orders: buy or sell orders that will be activated when the current rate crosses some predetermined limit level When the rate falls below a predetermined limit level, traders may set a buy Conversely, when the rate is above a predetermined limit, a trader may place a Sell Limit Order (Limit) that is either active for a specific period of time (e.g., one day or one month) or active until cancelled (GTC) A Limit Order is active for the rest of the trading day, unless it is executed before the end of the trading day GTC Limit Orders remain active until filled, unless The account holder issues an order to cancel the order One order is valid, then the other order is cancelled (OCO): This is a combination of stop and limit orders (or two limit orders) set up at both ends of the spread When one order is triggered, the other order is terminated For long positions, the stop order will be placed below the market spread, while the limit sell order will be placed above the market spread If the base currency rate breaks the limit order limit If the base currency rate breaks the limit order limit, the position is automatically sold and the stop order is no longer needed, so the stop order is cancelled. Conversely, if the rate falls to the stop order trigger level, the position is closed and the limit order is not needed. If the rate falls to the limit order trigger level, then the limit order is activated, the short position is closed by repurchase, and the stop-loss order is cancelled Screen-based spot trading The technical means of trading Forex has evolved from telephone and telex to a modern electronic brokerage system (EBS) with integrated quoting, trading and management capabilities for straight-through processing (STP). Private traders do not trade in the interbank market, where spreads are small, and in practice, brokers add points to the spread in lieu of trading commissions Private traders require the following: A margin account broker with Internet access and fast connection A computer terminal capable of running several programs simultaneously Proprietary software with sufficient monitors to process market information, submit orders, display technical analysis, track open positions, manage orders (e.g. stop orders, take profit orders TPO, limit orders, etc.) and observe the status of margin accounts
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