The principle of margin trading
How to operate in the Forex market with a rather small money?
The important question that a lot of beginner traders are worried about is: How and why can I work at Forex market with sufficiently small money?
The initial period, the period of this market development was specific for the fact that only huge financial structures possessing funds of millions could trade at Forex. Due to this Forex market was not available for individual investors. But with the course of time and the development of the communication networks and facilities, and with the Internet development, in particular, the situation has changed dramatically: owing to new possibilities of attracting general public possessing available funds for market trading. The margin trade principal appeared and started to be widely used. Thanks to that Forex has become opened and available almost to everyone even possessing very small money at one’s disposal.
The margin trade principal is based on the automatic credit issued to a client for execution deals. This credit is called leverage and is provided by an intermediary (a dealing center or a bank) that “markets” a target client to Forex providing him/ her with the trading platform and everything required for conducting deals. During the working process a client deposits the pledge, the amount of which can be relatively insufficient (from several dollars). At a later stage the intermediary issues credits to the client automatically. The amount of the credit depends on the leverage and can be 30- 200 times more than the margin. For instance, having the margin in the amount of $50, the client has the possibility to effect a deal with five thousand dollars at leverage one to one hundred (1:100).
According to our company’s policy, we offer our clients to choose the value of the credit (the leverage) on their own. The maximum leverage is 1: 1000. During the working process you also have the possibility to alter this value, decreasing or increasing your risks depending on the situation. The final trader’s risk is only limited by the margin because we, as a financial intermediary, do not provide any real amount of currency for the whole value of the opened deal including the leverage but ensure loss or profit enrolling in the full amount at the moment of closing the deal. In other words, the situation when a trader remains owing to the company will never occur. The maximum loss is equal to the value of the security funds.
Let us consider the types of deals possible to be concluded by a trader and the profit generation taking a popular currency pair EUR/USD as the example.
The rate 1.5000 for a currency pair EUR/USD will mean that 1 EUR costs 1.5000 USD. To buy one hundred Euros you are to spend 150 dollars. When the cost of a base currency (in our case it is Euro) is denominated in dollars, such quote is called direct. Base currency is placed first in the ratio. And vice versa, indirect quote is when a dollar is a base currency and its price is denominated in the units of other currency. For direct quotation EUR/USD the reverse quotation will be USD/EUR. It is rather easy to calculate a reverse quotation, it equals 1/ (direct quote) or 1/ 1.5000= 0.6666. That means, to buy 100 dollars you are to spend 66.66 Euros.
The considerable difference of the Forex market from any other classic markets consists in the fact that transactions can be conducted in quite an unusual way, i.e. not to buy at first and then to sell, but vice versa – first to sell and then to buy. If operate with specified above direct and indirect quotes such possibility becomes rather clear: sale operation EUR/ USD (at a direct quote) is absolutely similar to purchase operation USD/ EUR (at an indirect quote). Any operation conducted at Forex contains two constituencies: opening a deal/ closing a deal ( buy then - sell or sell then - buy), no matter what the sequence is. Sell => buy operation can be interpreted as the purchase operation, then – the sale operation, but at the reverse values of the cross rate. In the terminology of the foreign exchange market, a purchase is defined as Buy, and a sale - as Sell. Accordingly, two types of deals that traders can effect are Buy=>Sell or Sell=>Buy.
Besides direct and indirect quotes (with the dollar as one of the currencies in the quote), traders at Forex operate with cross rates too. A Cross rate is an exchange rate between two currencies (without any obvious presence of the dollar in the cross denomination) that results from their rate in relation to the third currency. The example of a cross rate is EUR/ JPY resulting from the quotes EUR/USD and USD/JPY. As we see, the dollar is the third currency and the cross rate is EUR/JPY = EUR/USD x USD/JPY.
