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What is margin?

Margin presents itself guarantee funds in the account (deposit), in the required amount, that allows you to open position and start trading on the Forex market. The amount of margin depends on sum of your fund, that you expose for your trading operations. In other words, the margin is the size of your deposit or trading account. Margin is a guarantee for payment of damages, in case if trade fails.

What is a forex spread?

Spread is a difference between maximal purchase price (bid) and sale price (ask), which is estimated in points. In other words it is commission/interest, that broker receives, after the completion of transaction by trader. Largely owing to the spread, earned from the carried out transactions, the brokerage firms get major portion of their income.

What is scalping?

Scalping is a trading strategy, based on hunt of price change impulses, in which the frequency of trading operations reaches up to 3000-4000 in one trading session, and the average is 500-1500.

The most common scalping tactics is based on the intuitive character, when trader doesn't analyze situation on the market, but performs cutting losses, expecting to catch a strong impulse for profit earning.

How does leverage work in the forex market?

The leverage is provided by broker to trader for profit markup of the latter, and for the bargaining if its amount exceeds the sum the trader owns on his deposit. For instance when leverage is 1:200 and the trader possesses 1000 USD on his account, the investor can settle a bargain two hundred times as much the deposit is - up to 200 000 USD. Therewith the charge of leverage on the Forex market doesn't levy.

Loss of funds allotted to the trader under the leverage for the transaction is impossible, as if trading operation begins to bear loss, and sum of traders's internal funds is less than 10% of a loan, then the broker closes the trade without notifying the trader, avoiding larger loss of funds that the investor owns on his deposit.

What will happen if I make a deposit, but will not trade at all?

Part of the traders proceed exactly that way, because on the remains of all deposits a profit is accrued in the form of annual interest. Thereby you may open your trading account without making the transactions. Your funds will remain completely intact.

How the profit on Forex transactions is calculated?

Suppose, you have opened a long position (buy) on USD/JPY pair for two lots at 117.89. You have closed the position at 118.40. What is the profit?

Opening a deal, you bought 200,000 USD and sold 117.89 * 200,000 = 23,578,000 JPY.
Closing a deal, you sold 200,000 USD and bought 118.40 * 200,000 = 23,680,000 JPY.

Dollars are mutually cancelled, and you have +102,000 JPY left, or +861.49 USD at the transaction close price. This is your profit.

What does "long" or "short" position mean?

Long position is a position when a trader buys currency at one price, intending to sell it later at a higher price. In this case, an investor gains if market prices increase.
Short position is a position when a trader sells currency anticipating its decline. In this case, an investor gains if market prices decrease. However, it is important to remember that each position in Forex requires an investor to be "long" in one currency, and "short" in another one.

How is the margin for opening the position calculated?

Before calculating the margin for opening the position we should consider leverage size and base currency.
Base currency is the currency that goes first in the quotation. Example:
EURUSD - EUR is the base currency;
USDJPY - USD is the base currency;
GBPJPY - GBP is the base currency.
Let's consider the formula of how to calculate margin in the base currency.
Margin = Contract / Leverage
where:
Margin - margin size (let's name it X);
Contract - contract size in the base currency (let's name it Y);
Leverage - size of leverage (lets name it L).
Example:
leverage 1:100 means L=100
leverage 1:500 means L=500.


EXAMPLE:
Let's consider the deal volume of 1 lot with L=1:100. the lot size is always 100,000 of base currency (i.e. Y=100,000, L=100).
So:
X=Y/L=100,000/100=1000
Thus, for opening the position you need the margin of 1,000 base currency.
If the base currency is USD, the margin will be 1,000 USD.
If the base currency is not US dollar, but euro for example, the margin in the deposit currency (in US dollars) will equalize 1000*k, where k is the current currency rate against dollar.
For example, if EURUSD rate is 1,3000, the margins fro buying one lot will equalize 1000x1,3= 1300 USD.

How long should I hold the positions?

As a rule, the position stays open until one of the following conditions is met:

  • profit on the position is realized;
  • stop loss order or limit order put in action;
  • opening of a more appealing position, for which you want to spare the funds engaged.
What is the cost of one point in FOREX Market?

Let's calculate the cost of one point for 1.0 lot, for example, for GBP/CHF. Suppose, we are opening 1.0 lot for buying at 2.3300 and closing the position at 2.3301.

Opening the position, we buy 100,000 GBP and sell 2.3300*100,000=233,000 CHF.
Closing the position, we sell 100,000 GBP and buy 2.3301*100,000=233,010 CHF.

GBP are mutually cancelled, and +10 CHF (Swiss francs) are left, which is +10/(USD/CHF rate) =+10/1.5270=6.55 USD.

Thus, having earned 1 point on 1 lot in FOREX for GBP/CHF, we have gained 6.55 USD.

This is the price of 1 point for GBP/CHF. For other currency pairs, the point price is calculated likewise.


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