DISCLAIMER

The comments and posts published in this blog ARE NOT trading recommendations. They can NEVER be considered as trading calls or advices. If you decide to use the information offered here for your real trading it is at your own risk.

Trading foreign exchange on margin carries a high level of risk and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading and seek advice from an independent financial advisor if you have any doubts.

Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. we will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information.

Thursday, February 11, 2010

Basic terminologies and connotations of forex

In this post, we will look at the basic terms associated with forex and the minimum information you would need to understand any article in forex.

Leverage: It is the multiple by which the broker multiplies your investment on a particular contract. In stocks, we have been familiar with 2:1 leverage and maximum upto 10:1. The forex market allows you leverages of 100:1 and above! To some traders, this is insanity. However, higher leverage means you control a large contract with a relatively lesser sum of investment on your part.

For example, to buy a $100,000 contract of EURUSD, you would need $1000 at 100:1 leverage, and only $250 at 400:1 leverage! Determine which suits you better. Be informed though, that most successful traders keep their leverages lower than 10:1. Off course, they have larger portfolio than an average retail trader, which is approximately $5000.

Margin: The amount you need to deposit with the broker to control a contract. In the above example, if you are using 100:1 leverage, then your margin requirement is $1000. In case of 200:1, the margin requirement is... $500.

Spread: The brokerage in forex is termed as spread. Most brokers operate under the spread model now. The commission model is getting outdated as traders prefer the spread model now. The difference of spread from that in the stock market is that you have to pay fixed spreads in forex market. It is not like the brokerage in stocks where you have to pay a percent of your profit so it varies - the more you profit, the more is the brokerage. In forex, you can make this fixed spread thing work for you in a hedged trade.

Pip: No, this is not the guy from Charles Dickens' "Great Expectations". Pip is acronym for "percentage in points". It is the 1/10000th part of a forex contract, except those involving JPY, where it is 1/100th part.(because JPY hover around $100). In a trading day, the fluctuations happen in units of pips. However, nowadays you have 1/10th of a pip, so that the brokers can offer tighter spreads.




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