Lesson 3. Margin Trading
So we have already dealt with the possibility of buying and selling on forex, I will not again explains and pointed to as examples in the short term can earn money on forex and what is its uniqueness. Margin trading is one of the biggest advantages in the international market. It enables investors to trade even with little capital to Fores. Thanks to them, we are private investors can trade and work on international market. Without margin trading, we need at least one hundred thousand Dollar to get started. So, let's take a look how does margin trading. The investor takes out a loan with the possibility to market speculation, he takes it from middlemen on the exchange. This deposit consists of one to five percent of the value of the deal is also directly depends on the selected leverage. din of twenty one to fifty, one hundred, and to whether there is one to two hundred, it all depends on how a broker you are working with. Simply put - this means that you can with a hundred dollars to get a loan of two thousand Dollar, up to twenty thousand. The more you scrip attachments robots the more you can earn money. But don forgot that the forex can easily double as the same amount and reduce it to two atoms and three times. Taking credit, the client can not lose more than invested, in other words, a private investor risks only his (Investments in Projects with money), and brokers provide credits, are protected.
Why do these companies do not give you credit? Are not they themselves can not invest this money? Let us analyze in detail on what have money from their company's.
And the benefits they receive from literally all over. Companies receive a percentage of your transactions, regardless of whether they are profitable or not, the percentage of permanently gradually bagining them for what they provide you with their services. In previous lessons, we have already spoken to you about the spread, so I think for you not to be news is that brokers also have money to spread because of the unnatural spread (which is not so in the real market), everything is on the market makes the company for the means ( given to you on credit). Also have money from campaign for clients that work with the smallest lots are not even between banks. This scheme does not distinct from the principle of roulette, but statistics suggest that the majority of small investors in the truest sense of the word "Media player" their money this company. So we have one more reason to slowly, quietly and leisurely understand incomes for the system to forex trading, and then make deposits and start trading.
Also, the company may charge interest on the loan is issued to you. This means that the sum of all open positions that go into the next day (not closed at the end of the day) and earn interest on the loan. At best, it will be the interest rate (refinancing rate), that is, the rate at which the central bank lends to commercial banks in the country. In this case we speak of bank interest (discussed in detail in the relevant chapter). Different countries have different rate of interest, so, depending on the exchange open positions and the type of transaction (purchase or sale), bank interest can be charged to the client as well as be charged to the client.
In margin trading real currency delivery will not occur and the value date is losing its meaning. Internet trader earns on speculation, opening the position for one price and closing it on the other. Traders can work with any currency pair, not only with the currency of their security deposit. Furthermore, traders can open both long and short positions in the interest of the currency pair. All profits and losses are translated into the currency of the security deposit.
Consider the principle of margin trading by example. Suppose you are working with mini lots and expect the growth rate of the dollar against the Japanese Yen USD / JPY. Your account is 2000 USD, and the size of one mini lot is equivalent to 10,000 U.S. dollars. Suppose your online broker gives you a leverage of 1:50. This means that in order to open a position, you need a security deposit of U.S. $ 200 (because 200 x 50 = 10,000). At the time of opening a long position in your account the amount of the security deposit is frozen, and only 1,800 dollars, called the free part of the bill, are at your disposal. On them you can open other positions.
Leave too little available funds in the account is not recommended. The fact is that once you open a position, fluctuations in the dollar the yen may temporarily go to the unfavorable side for you. This means that if you close your position at this point, we will incur losses, which will be debited from your account. Internet broker can not let your losses are greater than the size of your account, otherwise he will have to pay "from his pocket." Consequently, as soon as the current (floating) losses will reach the point where your score will not be able to cover them, your position will be automatically closed or blocked by the Internet broker (blocking position, lock position, will be considered in the Forex University). Such automatic closing of positions is preceded by the so-called margin call, which will be described in detail in the next chapter. Thus, the larger the amount in your account, the greater the fluctuations in the open position, you can withstand, avoiding the occurrence of margin call. After all, the direction of the course may change in the right direction for you and bring you profit, but if your account is not able to withstand temporary adverse fluctuations, then you are losses.
It should be noted that the higher position (lots) you open, the greater the available funds in your account. If in our example, the U.S. dollar and the Japanese Yen, we would not have opened a lot, but four, the security deposit would not be $ 200, and 800. Consequently, the free part of the bill would amount to 1,200 dollars. Since losing temporary fluctuations are now reflected on all four open positions, the chance to get a margin call increases proportionally - four times! In the next chapter, this situation will be discussed in detail.
Thus, margin trading provides a number of advantages Internet novice trader. With the right approach to trading, it can be a source of increasing your income. But, on the other hand, the increase in income is possible and the increased risk of loss. Therefore, margin trading - a "double-edged sword." It can make you very rich or very poor. Only your intellect, the practice of the Forex and share of luck determines your success!
Every time when a trader opens a position on Forex, using the services of Internet broker (dealing company), part of the money in his account frozen. This part is called the security deposit is used to provide assurance that the trader will never lose more money than is available in their account. Frozen funds are called the free part of the account and can be used to open new positions. But to use the full amount of the bill on the opening position is not recommended, as the free margin is also used to maintain the current level of losses (time loss) on open positions that become losses incurred by closing the position at the moment vremeni.Esli client has not enough funds to ensure the ongoing loss is the so-called margin call, signaling the need to update your account. Otherwise, the position is closed automatically online broker, and the client is a real loss. Current loss can be caused by unintended movement rate in the direction opposite to the open position. For example, suppose you have a long position in the U.S. dollar in the quote USD / JPY, and the U.S. dollar began to fall in price. This does not mean that you will suffer losses, because at a certain time course can be developed, and the U.S. dollar will rise again. But if at some point in the fall of the dollar against the yen amount in your account is insufficient to sustain current losses, your position will be automatically closed, and you will suffer real losses.
Amount in the account is divided into security deposit and free margin. Amount of security deposit depends on the amount of leverage provided by dealing company (as discussed in the previous chapter), a type of lots to which the trader is working and the number of such lots. In the case of leverage 1:50 and go long USD / JPY, open one mini lot (10,000 U.S. dollars) the amount of the security deposit is equal to 10,000 / 50 = $ 200. If our bill had 1,000 U.S. dollars, 200 of them are frozen, and 800 are at our disposal.
Since the opening of the positions calculated current profits or losses, as the dollar the yen is constantly changing. Imagine that the current loss amounted to $ 800, that is, came a moment that if we close the position, will incur a loss of $ 800. But the position is still open, and the course can turn in the opposite direction, bringing us a profit. We still believe that a long position was the right decision. But dealing company understands that if the losses exceed the current size of our bill, then pay extra for the loss it would have to "own pocket", and this of course it will not work. Since the Forex currency exchange rates may change quickly, it is difficult to fix the time when your current losses will be the exact amount in your account. Dealing company reinsured in this regard, so as soon as your current losses cover a portion of your security deposit, there comes a margin call, and all of your open positions are automatically closed. Your account remains unaffected only part of the security deposit, which is converted to the free account. Each Internet broker its own rules regarding the size of the current losses, leading to a margin call. The figure shows an example where 30% of the security deposit is the threshold value. This means that upon the occurrence of margin call, your account is still only 70% of the security deposit. In our example, a long position in U.S. dollars upon the occurrence of margin call on our bill will be 0.7 * 200 = $ 140. This amount is not even enough to open another position, so you have to make extra money in the account.
What swings should happen to come margin call? Suppose that the U.S. dollar to the Japanese Yen in the quote USD / JPY at the time of opening a long position was 104.75/85. That is, we bought dollars at the exchange rate of 104.85 yen per dollar. The position is closed reverse transaction, ie selling dollars for yen and Restatement of profit / loss in U.S. dollars. Assume a constant spread size (10 points), and we are interested in a quotation USD / JPY X / (X +10), at which a margin call. Since we opened one mini lot position (worth 10,000 U.S. dollars), $ 200 security deposit is on, $ 800 are free margin, we get the following equation:
10 000 * (104.85 - X) / (X + 10) = 800 + 0.3 * 200
Hence it follows that X is equal to 95.76. That is the quotation which comes margin call, to be USD / JPY 95.76/86. We see that the rate should fall to around 900 points, came to margin call. In practice, for such a large change in the course must pass a lot of time, it is unlikely that we will get margin call.
What would happen if instead of one mini lot, we have opened a position at once by four (worth 40,000 U.S. dollars)? Then the security deposit would be $ 800, available funds in the account would remain $ 200, and our equation would have taken the form:
4 * 10000 * (104.85 - X) / (X + 10) = 200 + 0.3 * 800
In this equation, X would be equal to 103.6. That is the quotation which comes margin call, would be 103.60/70. We see that in this case, the oscillation rate at just over 100 points would lead to a margin call. It should be noted that the fluctuation of 100 points during the trading day - this is a common phenomenon in Forex. This example shows that the greater the amount of your open positions and the less money remains in the free part of your score, the more likely that you will get a margin call. Take this with a high degree of seriousness!
From the above it can be a view that, in order to avoid a margin call is necessary to constantly monitor all open positions and close them in advance to minimize losses if the rate changes in an unfavorable direction. In order to rid the Internet of terydera need for constant monitoring of the quotations, introduced the term limit order (limit order). With it you can have when opening a position to specify thresholds for the current losses (stop order, stop loss) and operating income (target, target, take-profit). As soon as the current profit or loss will exceed the threshold, the position will be closed automatically. In contrast to the market order (market order), which is a request to open or close a position at the current market price, limit orders to limit your losses as well as your expected profit. On these terms will be discussed in more detail in the section Forex University.
So, as the Internet trader, you have to be afraid of fire as a margin call. After all, his offensive can simply make you lose everything. Therefore, in every possible way to avoid situations where a large portion of your account is frozen under a security deposit and make sure that the free part of your bill always had enough money. Do not try to open positions on all available in the free cash account and use limit orders
Interest of banks
At the moment, we have found that the margin trading involves the use of borrowed capital - the trader takes cash for transactions on the Internet from your forex broker. To understand the material in this chapter, we need to examine the principle of circulation of money in the state. Imagine that formed the new state. There is a working-age population, but the money in the state yet - what to do? The Central Bank of the virtual state of our requests to print a series of coin-operated home banknotes standard pattern. Let us assume that the notes are printed, but now distribute them to the public? In the state there is a number of commercial banks, which take a loan from the Central Bank (style credit). Credit, as we know, does not come for free, for it must pay interest. This is - a key point of forming monetary policy. The central bank sets the interest rate at which lends to commercial banks. In different countries, this rate is called differently. In Russia it is called refinancing rate (the interest rate). In the foreign literature it can be called interest rate, base rate, key bank rate, etc. Let's return to our virtual state - now commercial banks have money, and they, in turn, begin to issue loans to organizations at a higher percentage than the refinancing rate. Thus, commercial banks earn profit on the difference in interest rates on the loan. Establishing the organization as a business, hire employees who are paid wages. As a result, business processes in organizations are goods (or services are provided). Profit organization, and return to commercial banks borrowed money and interest. Commercial banks, in turn, pay for the loans with the Central Bank. As a result, the money distributed by the state. Of course, this is a very simplified diagram, but her understanding is very important for the study of Forex trading borrowed capital.
The interest rate in the state - one of the main levers to regulate the rate of inflation. Inflation is an increase in the amount of cash in circulation. In other words, the banknotes in circulation becomes larger, they can buy more. In this situation, organizations are trying to increase the prices of goods and services as a result of money depreciates. To slow the growth of inflation should reduce the amount of cash in circulation. To do this, the government increases the interest rate. The meaning higher interest rates to slow the rate of inflation, at first glance, is not obvious, and to understand it is just necessary to know the basis of education money in the state. The higher the interest rate, the larger commercial banks have to raise interest rates for loans to organizations. Consequently, organizations are taking in less debt, the production is minimized, the salary is paid on a smaller scale, and therefore the amount of cash in circulation is reduced. As a side-effect of this "intervention" because of reductions in production in the state increased levels of unemployment. This example shows that in the state of all processes are interrelated, and often have to sacrifice one for the other.
What is the meaning of all this for the Internet trader? Consider an example where we are going to buy U.S. dollars for Japanese yen on the quote USD / JPY. In Internet broker, we have opened the account for 1000 dollars. We have already said that the principle of margin trading allows us to buy dollars for yen, even if we do not have Ian. But it is important to understand that the yen is not taken out of the air - these Yen, we take a loan from online broker! They buy dollars (Internet broker buys them on our behalf). And another very important point - bought dollars remain with Internet broker, we do not dispose them. The only thing that we can do with them - it is to sell them back at Jena, ie close the position at a profit or a loss. So bought dollars remain with Internet broker. In other words, we give them a loan online broker.
We have already learned that if we take the money in the debt (take credit), we have to pay the appropriate credit rate. Since all transactions are carried out in the interbank forex level used is the same interest rate charged by the Central Bank. And, if we took in U.S. dollars loan, the interest is paid at the rate set by the Central Bank of the United States (Federal Reserve Bank). If we took in the Japanese Yen loan, the interest is paid at the rate set by the Central Bank of Japan (Bank of Japan). Different countries have different interest rates, which we'll talk.
The interest rate expressed as a percentage per annum (%). In Japan, at the time of writing this chapter, it is set to 0.5%, while in the U.S. it is equal to 3.0%. So for borrowed from Japanese Yen Internet broker we pay 0.5% annual interest on the loan taken. But the Internet broker for obligations we have to borrow U.S. dollars pays 3.0% per annum. Note that this principle applies only if our long open position on the quote USD / JPY does not close for several days. That is, interest is calculated daily on the open positions! If we close the position on the same day that it opened, the interest rate used in the calculations. Suppose that our position was opened for a month, and at the end of the month we have decided to close it. For simplicity, assume that the rate of purchase is equal to the rate of sales, we have a course on the quote USD / JPY remained virtually unchanged for the month. On exchange we earned nothing. But what about the credit crunch? We have to pay the broker Internet 0.5% per annum for one month, which is about 0.5% / 12 = 0.04% of the amount taken. We have to pay this amount in yen, but the calculations are converted into the currency of our account, in this case, in U.S. dollars at the exchange rate of dollar sales in the quote USD / JPY. Internet broker must pay us 3.0% per annum for one month, that is, 3.0% / 12 = 0.25% of the dollar amount taken. It should be understood that the amount taken, we must in yen, and the amount that we have in the U.S., equivalent to the size of the open position, ie the size of one lot, lot or mini micro lot, depending on what the lot size we use. Assume the position was opened one mini lot (one mini lot is equivalent to 10,000 U.S. dollars). Then, in our example, we will earn on the difference in interest rates of 0.25% - 0.04% = 0.21% of the size of a mini lot, ie about 10 000 * 0.0021 = 21 dollars.
Keep in mind that if we opened a short position on U.S. dollar (U.S. dollars sold for Japanese Yen), the result would not have earned and lost U.S. $ 21 on the difference in interest rates. Do you earn or lose on the difference in interest rates depends on the currency being traded and the type of open position (long or short). The amount payable on the interest rate called the bank interest (interest). In margin trading bank interest earned is always on the currency, which is always bought and paid for the currency you are buying for.
As we have just seen, the profit on Forex can earn not only on the change in foreign exchange rates, but also on the difference in interest rates around the world. Type of Forex trading, which involves income on the difference in interest rates is called carry trading. Not all online brokers pay the bank interest - there are those who only earn on the interest rate, but never on it do not pay. Some online brokers current interest rates might differ from the Central Bank of the countries of the world and may change over time. Therefore, consult with a broker over the internet bank interest payments on interest rates before you make it a live account! Opening the position you must clearly understand the components of your income and your expenses, not to deliberately open trading position or close it with a loss. It is important to understand that the bank may be of interest as part of your income and your expenses component. In the latter case, close a position as to overlap not only spread but block interest costs bank.
The concept of bank interest and the interest rate may confuse the novice online trader, so if you do not want to initially deal with these concepts, just do not leave your position open through the night (overnight). Use only the strategy of day trading (day trading). If the position is opened and closed on the same day, the bank interest on it is not calculated. On the trading strategies will be discussed in detail in the section Forex University.
We have already said that on weekends and holidays active trading in Forex is not conducted. Therefore, bank interest can be calculated evenly throughout the week. That is, at the weekend it is not calculated, and the corresponding weekly share of bank interest spread on weekdays. Considering that in the week 7 days, we can have a situation where on Monday, Tuesday, Thursday and Friday have on seventh week of bank interest, and on Wednesday have three sevenths. Typically, Internet brokers publish a table that indicates the distribution of bank interest on weekdays. We emphasize once again that the bank interest is calculated daily! \
Below is a table which shows the interest rates of the world, operating in March 2008, in order to reduce the share of trading on the Forex relevant currency. The table also shows the name of the central banks of the world, and links to their pages on the Internet.
So we have already dealt with the possibility of buying and selling on forex, I will not again explains and pointed to as examples in the short term can earn money on forex and what is its uniqueness. Margin trading is one of the biggest advantages in the international market. It enables investors to trade even with little capital to Fores. Thanks to them, we are private investors can trade and work on international market. Without margin trading, we need at least one hundred thousand Dollar to get started. So, let's take a look how does margin trading. The investor takes out a loan with the possibility to market speculation, he takes it from middlemen on the exchange. This deposit consists of one to five percent of the value of the deal is also directly depends on the selected leverage. din of twenty one to fifty, one hundred, and to whether there is one to two hundred, it all depends on how a broker you are working with. Simply put - this means that you can with a hundred dollars to get a loan of two thousand Dollar, up to twenty thousand. The more you scrip attachments robots the more you can earn money. But don forgot that the forex can easily double as the same amount and reduce it to two atoms and three times. Taking credit, the client can not lose more than invested, in other words, a private investor risks only his (Investments in Projects with money), and brokers provide credits, are protected.
Why do these companies do not give you credit? Are not they themselves can not invest this money? Let us analyze in detail on what have money from their company's.
And the benefits they receive from literally all over. Companies receive a percentage of your transactions, regardless of whether they are profitable or not, the percentage of permanently gradually bagining them for what they provide you with their services. In previous lessons, we have already spoken to you about the spread, so I think for you not to be news is that brokers also have money to spread because of the unnatural spread (which is not so in the real market), everything is on the market makes the company for the means ( given to you on credit). Also have money from campaign for clients that work with the smallest lots are not even between banks. This scheme does not distinct from the principle of roulette, but statistics suggest that the majority of small investors in the truest sense of the word "Media player" their money this company. So we have one more reason to slowly, quietly and leisurely understand incomes for the system to forex trading, and then make deposits and start trading.
Also, the company may charge interest on the loan is issued to you. This means that the sum of all open positions that go into the next day (not closed at the end of the day) and earn interest on the loan. At best, it will be the interest rate (refinancing rate), that is, the rate at which the central bank lends to commercial banks in the country. In this case we speak of bank interest (discussed in detail in the relevant chapter). Different countries have different rate of interest, so, depending on the exchange open positions and the type of transaction (purchase or sale), bank interest can be charged to the client as well as be charged to the client.
In margin trading real currency delivery will not occur and the value date is losing its meaning. Internet trader earns on speculation, opening the position for one price and closing it on the other. Traders can work with any currency pair, not only with the currency of their security deposit. Furthermore, traders can open both long and short positions in the interest of the currency pair. All profits and losses are translated into the currency of the security deposit.
Consider the principle of margin trading by example. Suppose you are working with mini lots and expect the growth rate of the dollar against the Japanese Yen USD / JPY. Your account is 2000 USD, and the size of one mini lot is equivalent to 10,000 U.S. dollars. Suppose your online broker gives you a leverage of 1:50. This means that in order to open a position, you need a security deposit of U.S. $ 200 (because 200 x 50 = 10,000). At the time of opening a long position in your account the amount of the security deposit is frozen, and only 1,800 dollars, called the free part of the bill, are at your disposal. On them you can open other positions.
Leave too little available funds in the account is not recommended. The fact is that once you open a position, fluctuations in the dollar the yen may temporarily go to the unfavorable side for you. This means that if you close your position at this point, we will incur losses, which will be debited from your account. Internet broker can not let your losses are greater than the size of your account, otherwise he will have to pay "from his pocket." Consequently, as soon as the current (floating) losses will reach the point where your score will not be able to cover them, your position will be automatically closed or blocked by the Internet broker (blocking position, lock position, will be considered in the Forex University). Such automatic closing of positions is preceded by the so-called margin call, which will be described in detail in the next chapter. Thus, the larger the amount in your account, the greater the fluctuations in the open position, you can withstand, avoiding the occurrence of margin call. After all, the direction of the course may change in the right direction for you and bring you profit, but if your account is not able to withstand temporary adverse fluctuations, then you are losses.
It should be noted that the higher position (lots) you open, the greater the available funds in your account. If in our example, the U.S. dollar and the Japanese Yen, we would not have opened a lot, but four, the security deposit would not be $ 200, and 800. Consequently, the free part of the bill would amount to 1,200 dollars. Since losing temporary fluctuations are now reflected on all four open positions, the chance to get a margin call increases proportionally - four times! In the next chapter, this situation will be discussed in detail.
Thus, margin trading provides a number of advantages Internet novice trader. With the right approach to trading, it can be a source of increasing your income. But, on the other hand, the increase in income is possible and the increased risk of loss. Therefore, margin trading - a "double-edged sword." It can make you very rich or very poor. Only your intellect, the practice of the Forex and share of luck determines your success!
Every time when a trader opens a position on Forex, using the services of Internet broker (dealing company), part of the money in his account frozen. This part is called the security deposit is used to provide assurance that the trader will never lose more money than is available in their account. Frozen funds are called the free part of the account and can be used to open new positions. But to use the full amount of the bill on the opening position is not recommended, as the free margin is also used to maintain the current level of losses (time loss) on open positions that become losses incurred by closing the position at the moment vremeni.Esli client has not enough funds to ensure the ongoing loss is the so-called margin call, signaling the need to update your account. Otherwise, the position is closed automatically online broker, and the client is a real loss. Current loss can be caused by unintended movement rate in the direction opposite to the open position. For example, suppose you have a long position in the U.S. dollar in the quote USD / JPY, and the U.S. dollar began to fall in price. This does not mean that you will suffer losses, because at a certain time course can be developed, and the U.S. dollar will rise again. But if at some point in the fall of the dollar against the yen amount in your account is insufficient to sustain current losses, your position will be automatically closed, and you will suffer real losses.
Amount in the account is divided into security deposit and free margin. Amount of security deposit depends on the amount of leverage provided by dealing company (as discussed in the previous chapter), a type of lots to which the trader is working and the number of such lots. In the case of leverage 1:50 and go long USD / JPY, open one mini lot (10,000 U.S. dollars) the amount of the security deposit is equal to 10,000 / 50 = $ 200. If our bill had 1,000 U.S. dollars, 200 of them are frozen, and 800 are at our disposal.
Since the opening of the positions calculated current profits or losses, as the dollar the yen is constantly changing. Imagine that the current loss amounted to $ 800, that is, came a moment that if we close the position, will incur a loss of $ 800. But the position is still open, and the course can turn in the opposite direction, bringing us a profit. We still believe that a long position was the right decision. But dealing company understands that if the losses exceed the current size of our bill, then pay extra for the loss it would have to "own pocket", and this of course it will not work. Since the Forex currency exchange rates may change quickly, it is difficult to fix the time when your current losses will be the exact amount in your account. Dealing company reinsured in this regard, so as soon as your current losses cover a portion of your security deposit, there comes a margin call, and all of your open positions are automatically closed. Your account remains unaffected only part of the security deposit, which is converted to the free account. Each Internet broker its own rules regarding the size of the current losses, leading to a margin call. The figure shows an example where 30% of the security deposit is the threshold value. This means that upon the occurrence of margin call, your account is still only 70% of the security deposit. In our example, a long position in U.S. dollars upon the occurrence of margin call on our bill will be 0.7 * 200 = $ 140. This amount is not even enough to open another position, so you have to make extra money in the account.
What swings should happen to come margin call? Suppose that the U.S. dollar to the Japanese Yen in the quote USD / JPY at the time of opening a long position was 104.75/85. That is, we bought dollars at the exchange rate of 104.85 yen per dollar. The position is closed reverse transaction, ie selling dollars for yen and Restatement of profit / loss in U.S. dollars. Assume a constant spread size (10 points), and we are interested in a quotation USD / JPY X / (X +10), at which a margin call. Since we opened one mini lot position (worth 10,000 U.S. dollars), $ 200 security deposit is on, $ 800 are free margin, we get the following equation:
10 000 * (104.85 - X) / (X + 10) = 800 + 0.3 * 200
Hence it follows that X is equal to 95.76. That is the quotation which comes margin call, to be USD / JPY 95.76/86. We see that the rate should fall to around 900 points, came to margin call. In practice, for such a large change in the course must pass a lot of time, it is unlikely that we will get margin call.
What would happen if instead of one mini lot, we have opened a position at once by four (worth 40,000 U.S. dollars)? Then the security deposit would be $ 800, available funds in the account would remain $ 200, and our equation would have taken the form:
4 * 10000 * (104.85 - X) / (X + 10) = 200 + 0.3 * 800
In this equation, X would be equal to 103.6. That is the quotation which comes margin call, would be 103.60/70. We see that in this case, the oscillation rate at just over 100 points would lead to a margin call. It should be noted that the fluctuation of 100 points during the trading day - this is a common phenomenon in Forex. This example shows that the greater the amount of your open positions and the less money remains in the free part of your score, the more likely that you will get a margin call. Take this with a high degree of seriousness!
From the above it can be a view that, in order to avoid a margin call is necessary to constantly monitor all open positions and close them in advance to minimize losses if the rate changes in an unfavorable direction. In order to rid the Internet of terydera need for constant monitoring of the quotations, introduced the term limit order (limit order). With it you can have when opening a position to specify thresholds for the current losses (stop order, stop loss) and operating income (target, target, take-profit). As soon as the current profit or loss will exceed the threshold, the position will be closed automatically. In contrast to the market order (market order), which is a request to open or close a position at the current market price, limit orders to limit your losses as well as your expected profit. On these terms will be discussed in more detail in the section Forex University.
So, as the Internet trader, you have to be afraid of fire as a margin call. After all, his offensive can simply make you lose everything. Therefore, in every possible way to avoid situations where a large portion of your account is frozen under a security deposit and make sure that the free part of your bill always had enough money. Do not try to open positions on all available in the free cash account and use limit orders
Interest of banks
At the moment, we have found that the margin trading involves the use of borrowed capital - the trader takes cash for transactions on the Internet from your forex broker. To understand the material in this chapter, we need to examine the principle of circulation of money in the state. Imagine that formed the new state. There is a working-age population, but the money in the state yet - what to do? The Central Bank of the virtual state of our requests to print a series of coin-operated home banknotes standard pattern. Let us assume that the notes are printed, but now distribute them to the public? In the state there is a number of commercial banks, which take a loan from the Central Bank (style credit). Credit, as we know, does not come for free, for it must pay interest. This is - a key point of forming monetary policy. The central bank sets the interest rate at which lends to commercial banks. In different countries, this rate is called differently. In Russia it is called refinancing rate (the interest rate). In the foreign literature it can be called interest rate, base rate, key bank rate, etc. Let's return to our virtual state - now commercial banks have money, and they, in turn, begin to issue loans to organizations at a higher percentage than the refinancing rate. Thus, commercial banks earn profit on the difference in interest rates on the loan. Establishing the organization as a business, hire employees who are paid wages. As a result, business processes in organizations are goods (or services are provided). Profit organization, and return to commercial banks borrowed money and interest. Commercial banks, in turn, pay for the loans with the Central Bank. As a result, the money distributed by the state. Of course, this is a very simplified diagram, but her understanding is very important for the study of Forex trading borrowed capital.
The interest rate in the state - one of the main levers to regulate the rate of inflation. Inflation is an increase in the amount of cash in circulation. In other words, the banknotes in circulation becomes larger, they can buy more. In this situation, organizations are trying to increase the prices of goods and services as a result of money depreciates. To slow the growth of inflation should reduce the amount of cash in circulation. To do this, the government increases the interest rate. The meaning higher interest rates to slow the rate of inflation, at first glance, is not obvious, and to understand it is just necessary to know the basis of education money in the state. The higher the interest rate, the larger commercial banks have to raise interest rates for loans to organizations. Consequently, organizations are taking in less debt, the production is minimized, the salary is paid on a smaller scale, and therefore the amount of cash in circulation is reduced. As a side-effect of this "intervention" because of reductions in production in the state increased levels of unemployment. This example shows that in the state of all processes are interrelated, and often have to sacrifice one for the other.
What is the meaning of all this for the Internet trader? Consider an example where we are going to buy U.S. dollars for Japanese yen on the quote USD / JPY. In Internet broker, we have opened the account for 1000 dollars. We have already said that the principle of margin trading allows us to buy dollars for yen, even if we do not have Ian. But it is important to understand that the yen is not taken out of the air - these Yen, we take a loan from online broker! They buy dollars (Internet broker buys them on our behalf). And another very important point - bought dollars remain with Internet broker, we do not dispose them. The only thing that we can do with them - it is to sell them back at Jena, ie close the position at a profit or a loss. So bought dollars remain with Internet broker. In other words, we give them a loan online broker.
We have already learned that if we take the money in the debt (take credit), we have to pay the appropriate credit rate. Since all transactions are carried out in the interbank forex level used is the same interest rate charged by the Central Bank. And, if we took in U.S. dollars loan, the interest is paid at the rate set by the Central Bank of the United States (Federal Reserve Bank). If we took in the Japanese Yen loan, the interest is paid at the rate set by the Central Bank of Japan (Bank of Japan). Different countries have different interest rates, which we'll talk.
The interest rate expressed as a percentage per annum (%). In Japan, at the time of writing this chapter, it is set to 0.5%, while in the U.S. it is equal to 3.0%. So for borrowed from Japanese Yen Internet broker we pay 0.5% annual interest on the loan taken. But the Internet broker for obligations we have to borrow U.S. dollars pays 3.0% per annum. Note that this principle applies only if our long open position on the quote USD / JPY does not close for several days. That is, interest is calculated daily on the open positions! If we close the position on the same day that it opened, the interest rate used in the calculations. Suppose that our position was opened for a month, and at the end of the month we have decided to close it. For simplicity, assume that the rate of purchase is equal to the rate of sales, we have a course on the quote USD / JPY remained virtually unchanged for the month. On exchange we earned nothing. But what about the credit crunch? We have to pay the broker Internet 0.5% per annum for one month, which is about 0.5% / 12 = 0.04% of the amount taken. We have to pay this amount in yen, but the calculations are converted into the currency of our account, in this case, in U.S. dollars at the exchange rate of dollar sales in the quote USD / JPY. Internet broker must pay us 3.0% per annum for one month, that is, 3.0% / 12 = 0.25% of the dollar amount taken. It should be understood that the amount taken, we must in yen, and the amount that we have in the U.S., equivalent to the size of the open position, ie the size of one lot, lot or mini micro lot, depending on what the lot size we use. Assume the position was opened one mini lot (one mini lot is equivalent to 10,000 U.S. dollars). Then, in our example, we will earn on the difference in interest rates of 0.25% - 0.04% = 0.21% of the size of a mini lot, ie about 10 000 * 0.0021 = 21 dollars.
Keep in mind that if we opened a short position on U.S. dollar (U.S. dollars sold for Japanese Yen), the result would not have earned and lost U.S. $ 21 on the difference in interest rates. Do you earn or lose on the difference in interest rates depends on the currency being traded and the type of open position (long or short). The amount payable on the interest rate called the bank interest (interest). In margin trading bank interest earned is always on the currency, which is always bought and paid for the currency you are buying for.
As we have just seen, the profit on Forex can earn not only on the change in foreign exchange rates, but also on the difference in interest rates around the world. Type of Forex trading, which involves income on the difference in interest rates is called carry trading. Not all online brokers pay the bank interest - there are those who only earn on the interest rate, but never on it do not pay. Some online brokers current interest rates might differ from the Central Bank of the countries of the world and may change over time. Therefore, consult with a broker over the internet bank interest payments on interest rates before you make it a live account! Opening the position you must clearly understand the components of your income and your expenses, not to deliberately open trading position or close it with a loss. It is important to understand that the bank may be of interest as part of your income and your expenses component. In the latter case, close a position as to overlap not only spread but block interest costs bank.
The concept of bank interest and the interest rate may confuse the novice online trader, so if you do not want to initially deal with these concepts, just do not leave your position open through the night (overnight). Use only the strategy of day trading (day trading). If the position is opened and closed on the same day, the bank interest on it is not calculated. On the trading strategies will be discussed in detail in the section Forex University.
We have already said that on weekends and holidays active trading in Forex is not conducted. Therefore, bank interest can be calculated evenly throughout the week. That is, at the weekend it is not calculated, and the corresponding weekly share of bank interest spread on weekdays. Considering that in the week 7 days, we can have a situation where on Monday, Tuesday, Thursday and Friday have on seventh week of bank interest, and on Wednesday have three sevenths. Typically, Internet brokers publish a table that indicates the distribution of bank interest on weekdays. We emphasize once again that the bank interest is calculated daily! \
Below is a table which shows the interest rates of the world, operating in March 2008, in order to reduce the share of trading on the Forex relevant currency. The table also shows the name of the central banks of the world, and links to their pages on the Internet.
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