Margin Trading: Stocks vs Forex

Margin Trading: Stocks vs Forex

The word "margin" means something very different in forex than it does in stocks.

With stocks, trading on margin means that a trader can borrow up to 50% of a stock's value to buy that stock. This can be a costly move because the investor must pay interest to the brokerage firm on the amount borrowed. This is not the case in forex trading.

• For example, at $400/share, 100 shares of Google are valued at $40,000 ($400 x 100 shares). To trade this stock on margin, the money required for the trade is 50%, or $20,000. The remaining $20,000 is borrowed and interest must be paid on that amount. Margin interest is different from broker to broker, but a good rule of thumb is typically Prime plus 1-3% or more.

In forex, margin is the minimum required balance to place a trade. When you open a forex trading account, the money you deposit acts as collateral for your trades. This deposit, called margin, is typically 1% of the value of the position.

• For example, if you want to purchase $100,000 of USD/JPY at 100:1 leverage, the money required is 1%, or $1000. The other $99,000 is collateralized with your remaining account balance. You pay no interest.

It is very important to remember that increasing leverage increases risk. You should monitor your account balance on a regular basis and utilize stop-loss orders on every open position in an attempt to limit downside risk.

Here's a hypothetical example that demonstrates the upside of leverage:

With a US$5,000 balance in your account, you decide that the US Dollar (USD) is undervalued against the Swiss Franc (CHF).

To execute this strategy, you must buy Dollars (simultaneously selling Francs), and then wait for the exchange rate to rise.

The current bid/ask price for USD/CHF is 1.2322/1.2327 (meaning you can buy $1 US for 1.2327 Swiss Francs or sell $1 US for 1.2322 francs)

Your available leverage is 100:1 or 1%. You execute the trade, buying a one lot: buying 100,000 US dollars and selling 123,270 Swiss Francs. At 100:1 leverage, your initial margin deposit for this trade is $1,000.

As you expected, USD/CHF rises 50 pips to 1.2372/77. Since you're long dollars (and are short francs), you must now sell dollars and buy back the francs to realize any profit.

You close out the position, selling one lot (selling 100,000 US dollars and receiving 123,720 CHF) Since you originally sold (paid) 123,270 CHF, your profit is 450 CHF.

To calculate your P&L in terms of US dollars, simply divide 450 by the current USD/CHF rate of 1.2372. Your profit on this trade is $364.3

Leverage & Margin

Leverage & Margin

The leverage available in forex trading is one of main attractions of this market for many traders. Leveraged trading, or trading on margin, simply means that you are not required to put up the full value of the position.

Forex provides more leverage than stocks or futures. In forex trading, the amount of leverage available can be up to 200 times the value of your account.

There are several reasons for the higher leverage that is offered in the forex market. On a daily basis, the volatility of the major currencies is less than 1%. This is much lower than an active stock, which can easily have a 5-10% move in a single day. With leverage, you can capture higher returns on a smaller market movement. More importantly, leverage allows traders to increase their buying power and utilize less capital to trade. Of course, increasing leverage increases risk.

Forex Currency Trading Systems

Forex Currency Trading Systems

Forex Currency Trading Systems

The introduction of automated Forex currency trading systems has changed the landscape of Forex trading forever. In a market that once the domain of huge banks and investment firms automated Forex currency trading systems have opened the door for smaller players and individual speculators to win and lose in world’s largest and most liquid foreign currency exchange market.

While real-time Forex trading hasn’t always been easily accessible to individual investors, this changed significantly with the advent of automated Forex currency trading systems. Automated Forex trading systems enable even individual traders to able to execute real-time, instantaneous trades any time of the day or night. Now, anyone with a computer and an Internet connection can open a Forex trading account and experience first hand the risks and rewards of Forex trading.

The sheer size of the Forex trading market is staggering. It is the largest and most liquid financial market on the planet, and it is open around-the-clock. People trade in high dollars in the Forex trading market, and this market has highest average revenue per active trader of any financial market. The Forex trading market also has greater daily turnover, on average, than the other markets.

There are more participants in the Forex trading market than in any other financial market, and there are many different type of participants. Banks, central banks, commercial enterprises, investment management firms, and retail Forex brokers have long been major players in the Forex trading market. With the advent of automated Forex currency trading systems, the Forex trading market became much more accessible to individual speculators who can now access trending information and real-time trades at a level equivalent to major market players.

Web-based automated Forex currency trading systems are the most popular choice among speculators. Such systems are hosted on secure servers and are managed by a web-based Forex trading provider. There are no software requirements, and it is easy for speculators to open and manage Forex trading accounts and execute real-time trades form a single platform. There are many different vendors and systems, and it is best to try out demos or dummy accounts before making a final decision.

Automated Forex currency trading systems can also provide traders with access to trending information based on various indicators. Technical indicators that are supported by many automated Forex currency trading systems include the following moving averages: weighted (WMA), exponential (EMA), simple (SMA), variable (VMA), and triangular (TMA).

There are many benefits of automated Forex currency trading systems. Traders are able to set up their accounts to automatically stop trading in a particular market if losses begin to occur in that market. Discretionary, stop, and limit orders may also be set up to execute automatically under specific market conditions. Forex currency trading systems typically include features that allow traders to manage the equity in their accounts as well.

Whether you are a professional investment manager or an speculative day trader working from your home computer, working with an automated Forex currency training system is very beneficial. No matter how large or small your commitment to Forex trading, there is a definite advantage associated with using an automated Forex currency trading system to manage your accounts and execute your trades.

Understanding Forex Quotes

Understanding Forex Quotes

Reading a foreign exchange quote may seem a bit confusing at first. However, it's really quite simple if you remember two things: 1) The first currency listed first is the base currency and 2) the value of the base currency is always 1.

The US dollar is the centerpiece of the Forex market and is normally considered the 'base' currency for quotes. In the "Majors", this includes USD/JPY, USD/CHF and USD/CAD. For these currencies and many others, quotes are expressed as a unit of $1 USD per the second currency quoted in the pair. For example, a quote of USD/JPY 110.01 means that one U.S. dollar is equal to 110.01 Japanese yen.

When the U.S. dollar is the base unit and
a currency quote goes up, it means the dollar has appreciated in value and the other currency has weakened. If the USD/JPY quote we previously mentioned increases to 113.01, the dollar is stronger because it will now buy more yen than before.

The three exceptions to this rule are the British pound (GBP), the Australian dollar (AUD) and the Euro (EUR). In these cases, you might see a quote such as GBP/USD 1.7366, meaning that one British pound equals 1.7366 U.S. dollars.

In these three currency pairs, where the U.S. dollar is not the base rate, a rising quote means a weakening dollar, as it now takes more U.S. dollars to equal one pound, euro or Australian dollar.

In other words, if a currency quote goes higher, that increases the value of the base currency. A lower quote means the base currency is weakening.

Currency pairs that do not involve the U.S. dollar are called cross currencies, but the premise is the same. For example, a quote of EUR/JPY 127.95 signifies that one Euro is equal to 127.95 Japanese yen.

When trading forex you will often see a two-sided quote, consisting of a 'bid' and 'ask':

The 'bid' is the price at which you can sell the base currency (at the same time buying the counter currency).
The 'ask' is the price at which you can buy the base currency (at the same time selling the counter currency).

What is FOREX ?

FOREX (FOReign EXchange market) is an international foreign exchange market, where money is sold and bought freely.

In its present condition FOREX was launched in the 1971, when free exchange rates were introduced, and only the participants of the market determine the price of one currency against the other proceeding from supply and demand.

As far as the freedom from any external control and free competition are concerned, FOREX is a perfect market.

FOREX is a more objective market, because if some of its participants would like to change prices, for some manipulative purpose, they would have to operate with tens of billions dollars.

The idea of marginal trading stems from the fact that in FOREX speculative interests can be satisfied without a real money supply.

In FOREX, it's not obligatory to buy some currency first in order to sell it later.

Usually Internet-brokers establish the minimum deposit such as $ 1000, for working in the FOREX market, and grant a leverage of 1:100.

The major currencies traded in FOREX, are Euro (EUR), Japanese yen (JPY), British Pound (GBP), and Swiss Franc (CHF).

A far bigger role in the FOREX market belongs to the expectations of the market participants and their assessment of these expectations.

The main merits of the FOREX market are: Qualified work in the FOREX market can become your main professional activity.