Margin, Spread, Pip and Pipettes

Trading currencies on margin lets you increase your buying power. Here's a simplified example: If you have $2,000 cash in a margin account that allows 100:1 leverage, you could purchase up to $200,000 worth of currency-because you only have to post 1% of the purchase price as collateral. Another way of saying this is that you have $200,000 in buying power.With more buying power, you can increase your total return on investment with less cash outlay. To be sure, trading on margin magnifies your profits AND your losses.

For Example :

With a US$5,000 balance in your margin account, you decide that the Euro (EUR) will rise against the US Dollar (USD).To execute this strategy, you must buy Euros (simultaneously sell Dollars), and then wait for the exchange rate to rise. The current bid/ask price for EUR/USD is 1.3000/1.3004 (meaning you can buy 1€ for 1.3004 USD or sell $1 US for 1.3000 EUR). Your available leverage is 100:1 or 1%. You execute the trade, buying 100,000 EUR (1 Lot) and selling 130,040 USD. At 100:1 leverage, your initial margin deposit for this trade is $1,000. Your account balance is now $4000. As you expected, EUR/USD rises to 1.3020/24. You can now sell 1€ for 1.3020 USD or buy 1 € for 1.3024 USD. Since you're long euros , you must now sell euros and buy back the dollars to realize any profit. You close out the position, selling one lot (selling 100,000 EUR and receiving 130,200 USD) Since you originally sold (paid) 130,040 USD, your profit is 160 USD.

When you trade with currency Your broker will always give you two prices - the one is that you can buy on it and the other is the one you can sell on the definite currency. The difference between the rate of buy and sell is called spread ( the English spread - the difference between two prices ). One pip is equal to 0.0001 of the currency rate ( exept the quoting of JPY where the difference is 0.01 ).

In a forex quote, for example, EUR/USD, the first currency quoted (EUR) is known as the base currency. The second currency (USD) is the quoted currency. In a forex spot quote, the bid and ask refer to the base currency.The market maker will only quote the last two digits of the bid and offer rate. For example, a EUR/USD quote of 0.8842/47 is quoted orally by the market maker as “forty two, seven.” These are known as the ‘pips’ or ‘points’. The first part of the quote, in this case, 0.88 is not quoted. This is known as the “big figure”.

Pipettes are fractional pips. 1 pippette = 0.1 pips or 10 pipettes = 1 pips. With pipettes the quote will be with 5 digits - EUR/USD 0.88421/0.88431 instead with 4.