Margin - 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.
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 a one lot: buying 100,000 EUR
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 1EURO for 1.3020 USD or buy 1 EUR 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.
Spread - 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 pips is equal to 0.0001 of the currency rate ( exept the qouting of JPY where the
difference is 0.01 ).
Pips - In a FX 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 spot quote, the bid and offer
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”.
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