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Now you
might be wondering how it is possible to earn big money
trading the Forex?
The answer
is Margin trading. In other words you trade with borrowed
money.
Forex is
always traded in Lots, so in actual fact you cannot purchase
just 100 Euros, (or in fact 100 units of any currency). A standard
Lot is $100,000, some brokers offer Mini-Lots of $10,000, and
a few brokers also offer Micro-Lots of $1,000. The good news
is you don't need anything like $100,000 to open a Forex account
or to trade the Forex...
The Forex
market uses a system called Margin trading, where you pay the
broker a security margin, usually between 0.25 and 5 percent.
The security margin gives you control over a very much larger
unit (or lot) of currency. For example, to trade a standard
lot $100,000, your broker will probably require a margin (deposit)
of 1 percent = $1,000. (In actual fact you will need more than
$1,000 in your account, in case the market moves against you.)
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Take
a look at the example below:
| Time |
EUR/USD |
Value |
Used
Margin |
| 10:00
AM |
1.4720/1.4725 |
$99,967 |
$1,033 |
| 12:14
PM |
1.4578/1.4583 |
$99,002 |
$1,998 |
| 1:00
PM |
1.4570/1.4575 |
$98,948 |
$2,052 |
| 5:00
PM |
1.4770/1.4775 |
$100,306 |
$0 |
Suppose
you sell $100,000 and buy Euros at 10:00 AM. The Euros will
cost $1.4725 each. So you will receive (rounded) 67912 EUR.
Your 67912 EUR will have a value of 67912 x 1.4720 = $99,967
(Note: You have lost $33 instantly because of the bid/ask spread.)
Now, suppose you sell your Euros at 5 PM and close the trade.
You sell your 67912 EUR and buy U.S. dollars. You receive $1.4770
for each Euro = 67912 x 1.4770 = $100,306. So you make an
overall profit of $306 on the days trading.
Margin trading
is an example of leverage (sometimes called gearing), where
you are using a relatively small amount of money to control
(or lever) a very much larger amount of money. This enables
you to profit (or lose) from very small changes
in Forex quotes.
If you trade
with $1,000, you will need more than $1,000 in your account.
In the example above, if you only had $1,000 in your account
to start, you would have a negative amount (-$33) in your account
immediately after your trade was opened.
Now,
suppose you started with $2,000 in your account:
You sell
U.S.$100,000 and buy Euros at 10:00 AM. Your used margin is
now $1,033, so the usable margin in your account is $2,000 -
$1,033 = $967. Imagine the trade moves against you, so that
at 12:14 PM the Forex quote: EUR/USD = 1.4578/1.4583. Your 67912
EUR are now worth 67912 x 1.4578 = $99,002, and the usable margin
in your account = $2,000 - $1,998 = $2. This would result in
a margin call, and your trade would be closed to prevent your
account going negative, so you would lose $1,998.
If however,
you had $3,000 in your account, your trade could have continued:
If the trade
had continued moving against you so that at 1:00 PM the Forex
quote: EUR/USD = 1.4570/1.4575. Your 67912 EUR are now worth
67912 x 1.4570 = $98,948. Your used margin is now $2,052 but
you still have $3,000 - $2,052 = $948 in your account, so you
can continue trading. If the Euro then recovers, so that at
5:00 PM the Forex quote: EUR/USD = 1.4770/1.4775, you sell your
67912 EUR at $1.4770 each and make an overall profit of $306.
Always aim
to have at least twice your margin in your account at all times
(even when a trade moves against you). However, it is safer
still if you never trade with more than 10 percent of your account
at any time.
Margin
Percent = 100/Leverage
Leverage = 100/Margin Percent
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