The biggest appeal that forex trading offers is the ability to trade on margin.Margin trading gives you the ability to enter into positions larger than your account balance.With a little bit of cash, you can open a much bigger trade in the forex market.A margin trading account displays the following metrics:<ul><li>Balance</li><li>Used Margin</li><li>Free Margin</li><li>Unrealized P/L</li><li>Equity</li><li>Margin Level</li></ul>As a trader, you need to be aware of the relationships between them.

What is Margin Trading?

In order to start trading forex, you need to open an account with a retail forex broker or CFD provider.Once your account is approved, then you can transfer funds into the account.This new account should only be funded with “risk capital”, which is cash you can afford to lose.Your Balance measures the amount of cash you have in your trading account.Your Balance will only change in one of three ways:<ul><li>When you add more funds to your account.</li><li>When you close a position.</li><li>When you keep a position open overnight and either receive or pay swap/rollover fee.</li></ul>

What is Account Balance?

When trading, there are actually two different types of “profit or loss”, also known as “P/L”.<ul><li>Unrealized P/L or Floating P/L refers to the profit or loss held in your current open positions or your currently active trades. Your unrealized P/L continuously fluctuates (or “floats”) with the current market prices if you have open positions & you have NOT closed the trade yet.</li><li>Realized P/L refers to profit/loss from a completed trade. Your profits/losses only become realized when the positions are CLOSED. This is the only time when your account balance will change to reflect any gains or losses.</li></ul>

What is Unrealized P/L and Realized P/L?

<ul><li>Realized profits are gains that have been converted into cash and ADDED to your account balance. </li><li>Realized losses are losses that have been converted into cash and DEDUCTED from your account balance.</li></ul>In other words, for you to realize profits from a trade you’ve made, you must receive cash and not simply observe the value of your trade increase without exiting the trade.Realized P/L can no longer be affected by price changes because it is no longer part of an active trade.

Profit Isn’t Real Until It’s Realized

When trading forex, you are only required to put up a small amount of capital to open and maintain a new position.This capital is known as the margin.Margin can be thought of as a good faith deposit or collateral that’s needed to open a position and keep it open.Margin is NOT a fee or a transaction cost.Margin is simply a portion of your funds that your forex broker sets aside from your account balance to keep your trade open and to ensure that you can cover the potential loss of the trade.This portion is “used” or “locked up” for the duration of the specific trade.

What is Margin?

Required Margin is the amount of money that is set aside & “locked up” when opening a position. It is also known as Deposit Margin, Entry Margin, or Initial Margin.When trading with margin, the amount of margin (Required Margin) needed to hold open a position is calculated as a percentage (Margin Requirement) of the position size (Notional Value).The specific amount of Required Margin is calculated according to the base currency of the currency pair traded.If the base currency is DIFFERENT from your trading account’s currency, the Required Margin is then converted to your account denomination.

What is Required Margin?

Used Margin is the TOTAL amount of margin currently in use to maintain all open positions.Said differently, it is the SUM of all Required Margin being used.If you open more than one position at a time, each specific position will have its own Required Margin.If you add up all of the Required Margin of all the positions that are open, the total amount is what’s called the Used Margin.While Required Margin is tied to a SPECIFIC trade, Used Margin refers to the amount of money you needed to deposit to keep ALL your trades open.

What is Used Margin?

Equity is your account balance plus the floating profit (or loss) of all your open positions.Equity represents the “real-time” value of your account.As your current trades rise or fall in value, so does your Equity.<ul><li>If you do NOT have any open positions, then your Equity is the same as your Balance.</li><li>If you have open positions, your Equity is the sum of your account balance and your account’s floating P/L.</li><li>Your account equity continuously fluctuates with the current market prices as long as you have any open positions.</li></ul>

What is Equity?

If your account is “flat” or does NOT have any positions open, then your Balance and Equity are the SAME.But if you do have open positions, this is when the Balance and Equity differ.<ul><li>The Balance reflects your profit/loss from closed positions (realized P/L).</li><li>The Equity reflects the real-time calculation of your profit/loss. The Equity takes into account both open & closed positions (Unrealized P/L).</li></ul>This means that when you’re looking at your Balance, it is NOT the actual real-time amount of your funds.

The Difference between Equity & Balance

Free Margin is the money that is NOT “locked up” due to an open position and can be used to open new positions.When Free Margin is at zero or less, additional positions cannot be opened.Free Margin can be thought of as two things:<ul><li>The amount available to open NEW positions.</li><li>The amount that EXISTING positions can move against you before you receive a Margin Call or Stop Out.</li></ul>Free Margin is also known as Usable Margin, Usable Maintenance Margin, Available Margin, and “Available to Trade“. Here’s how to calculate Free Margin:<ul><li>Free Margin = Equity - Used Margin</li></ul>

What is Free Margin?

The Margin Level is the percentage (%) value based on the amount of Equity versus Used Margin.<ul><li>The higher the Margin Level, the more Free Margin you have available to trade.</li><li>The lower the Margin Level, the less Free Margin available to trade, which could result in something very bad like a Margin Call or a Stop Out</li></ul> Here’s how to calculate Margin Level:<ul><li>Margin Level = (Equity / Used Margin) x 100%</li></ul> If you don’t have any trades open, your Margin Level will be ZERO. Margin Level is very important. Forex brokers use margin levels to determine whether you can open additional positions.

What is Margin Level?

In forex trading, the Margin Call is when the Margin Level has reached a specific level or threshold.When this threshold is reached, you are in danger of the POSSIBILITY of having some or all of your positions forcibly closed (or “liquidated“).If the Margin Level in your account falls to 100% or lower, a “Margin Call” will occur.A Margin Call is when your broker notifies you that your Margin Level has fallen below the required minimum level (the “Margin Call Level”).A Margin Call occurs when your floating losses are greater than your Used Margin.

What is a Margin Call?

The Stop Out Level is when the Equity is lower than a specific percentage of your Used Margin.This liquidation happens because the trading account can no longer support the open positions due to a lack of margin.If this level is reached, your broker will automatically start closing out your trades starting with the most unprofitable one until your Margin Level is back above the Stop Out Level. If your Margin Level is at or below the Stop Out Level, the broker will close any or all of your open positions as quickly as possible in order to protect you from possibly incurring further losses.

What is a Stop Out Level?

Each retail forex broker or CFD provider sets their own Margin Call Level and Stop Out Level.Depending on the broker, a “Margin Call” can be one of two things:<ul><li>If there is a separate Stop Out, your broker sends you a warning that your account equity has dropped below the required Margin Level percentage, There is no Equity to support your open positions any further.</li><li>If there is no separate Stop Out, your broker automatically closes your trades, starting from the least profitable one until the required Margin Level is met.</li></ul>

Different Forex Brokers Have Different Margin Call and Stop Out Levels

Margin Calls and Stop Outs occur due to overleveraging. Using more leverage can increase your gains, but it can also increase losses, which will quickly deplete your Free Margin. The more leverage you use, the faster your losses can accumulate.

Overleveraging

You use margin to create leverage.Leverage allows you to trade positions LARGER than the amount of money in your trading account.Leverage is the ratio between the amount of money you really have and the amount of money you can trade.When a trader opens a position, they are required to put up a fraction of that position’s value “in good faith”. In this case, the trader is said to be “leveraged”.The “fraction” part which is expressed in percentage terms is known as the “Margin Requirement”.

The Relationship Between Margin and Leverage

Here are five ways to avoid a margin call.<ol><li>Know a margin call is.</li><li>Know what the margin requirements are even before you place ANY order.</li><li>Use stop loss or trailing stops to avoid margin calls.</li><li>Scale in positions rather than entering all at once.</li><li>Know what you are doing as a trader.</li></ol> Risk management should be your main priority, not profits. Know when to cut your losses so you can trade another day.

How to Avoid a Margin Call

I want to make summary of what I have learned about Forex so that I can refresh it again.

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Technology & The Future

Learning Forex (Preschool) - Margin Trading 101: Understand How Your Margin Account Works

Here are just a few reasons why so many people are choosing this market:<ul><li>No fixed lot size lot or contract sizes are determined by the exchanges</li><li>Low transaction costs</li><li>A 24-hour market</li><li>No one can corner the market The FX market is sufficiently liquid that significant manipulation by any single entity is all but impossible during active trading hours for the major currencies.</li><li>Leverage</li><li>Deep Liquidity Extremely liquid</li><li>Low Barriers to Entry </li><li>Free Stuff Everywhere! You can use DEMO account</li></ul>

Why Trade Forex: Advantages Of Forex Trading

<ul><li>With <a href="https://www.babypips.com/forexpedia/forex-trading">forex</a>, there are dozens of currencies traded, but the majority of market players trade the seven major pairs.</li><li>Most forex brokers are open from Sunday at 5:00 pm EST until Friday at 5:00 pm EST, with customer service usually available 24/7.</li><li>Most forex brokers charge no commission or additional transaction fees to trade currencies online or over the phone.</li><li>Higher Trading Volume and Liquidity</li><li>Unlike the equity market, there is no restriction on short selling in the currency market.</li><li>Minimal Market Manipulation</li><li>Analysts and brokerage firms are less likely to influence the market</li></ul>

Why Trade Forex: Forex vs. Stocks

<ul><li>The futures markets can’t compete with its relatively limited liquidity while the forex market is always liquid.</li><li>24-Hour Market</li><li>Minimal or no commissions</li><li>When trading forex, you get rapid execution and price certainty under normal market conditions. In contrast, the futures and equities markets do not offer price certainty or instant trade execution.</li><li>Risk is minimized in the spot forex market because the online capabilities of the trading platform will automatically generate a margin call if the required margin amount exceeds the available trading capital in your account.</li></ul>

Why Trade Forex: Forex vs. Futures

Learning Forex (Preschool) - Why Trade Forex?

By its very nature, the stock market tends to be very monopolistic. There is only one entity, one specialist that controls prices.All trades must go through this specialist. Because of this, prices can easily be altered to benefit the specialist and not traders.In the stock market, the specialist is forced to fulfill the order of its clients. The specialist is able to widen the <a href="https://www.babypips.com/forexpedia/bidask-spread">spread</a> or increase the transaction cost to prevent sellers from entering the market.

Stock Market

In the <a href="https://www.babypips.com/forexpedia/forex">forex</a> market, there is no single price for a given currency at any time, which means quotes from different currency dealers vary.The market is so huge and the competition between dealers is so fierce that you get the best deal almost every single time.

Trading Spot Forex is Decentralized

The participants in the FX market can be organized into a ladder. At the very top of the forex market ladder is the interbank market.Composed of the largest banks in the world, the participants of this market trade directly with each other (“bilaterally”) or through voice or electronic brokers (such as EBS Market and Reuters/Refinitiv Matching).<ul><li>EBS platform: EUR/USD, USD/JPY, EUR/JPY, EUR/CHF, and USD/CHF are more liquid.</li><li>Reuters platform: GBP/USD, EUR/GBP, USD/CAD, AUD/USD, and NZD/USD are more liquid.</li></ul>Next on the ladder are the <a href="https://www.babypips.com/forexpedia/Hedge_Funds">hedge funds</a>, corporations, retail market makers, and retail ECNs.

The Forex Ladder

It is essential for you to understand the nature of the spot forex market and who are the main forex market players.Forex was originally intended to be used by bankers and large institutions, and not by us “little folks.”However, because of the rise of the internet, online forex brokers are now able to offer trading accounts to “retail” traders like us.The major forex market players:<ul><li>The Super Banks</li><li>Electronic Liquidity Providers (ELPs)</li><li>Large Commercial Companies</li><li>Governments and Central Banks</li><li>The Speculators</li></ul>

Forex Market Players

When it comes to forex trading, commercial banks and financial institutions are the movers and shakers.Since the forex spot market is decentralized, it is the largest banks in the world that determine the exchange rates.They’re responsible for most of the daily trading volume, and they make their money by acting as market makers.This means they’re constantly buying and selling currencies, pocketing the difference between the bid and ask prices.A couple of these include Citi, JPMorgan, UBS, Barclays, Deutsche Bank, Goldman Sachs, HSBC, and Bank of America.

The Super Banks

ELPs are specialized firms using advanced technology and trading algorithms to provide liquidity to market participants.Examples of ELPs are Citadel Securities, Flow Traders, HC Tech, Jump Trading, Virtu Financial, and XTX Markets.They operate as intermediaries between buyers and sellers in the currency market, constantly quoting bid and ask prices for various currency pairs.They also ensure that market participants can find counterparties for their trades, allowing for faster execution and reducing the potential impact of market volatility.

Electronic Liquidity Providers (ELPs)

The purpose for companies in Forex is to do business such as paying for goods & services, hedging their exposure to currency fluctuations, & managing the cash flow.Since the volume they trade is much smaller than those in the interbank market, this type of market player typically deals with commercial banks for their transactions.Mergers and acquisitions (M&A) between large companies can also create currency exchange rate fluctuations.In international cross-border M&As, a lot of currency conversions happen that could move prices around which still have a significant impact on the market.

Large Commercial Companies

Governments and central banks, such as the <a href="https://www.babypips.com/forexpedia/ecb">European Central Bank</a>, the <a href="https://www.babypips.com/forexpedia/bank-of-england">Bank of England</a>, and the <a href="https://www.babypips.com/forexpedia/federal-reserve">Federal Reserve</a>, are regularly involved in the forex market too.National governments <ul><li>They participate in the forex market for their operations, international trade payments & handling their foreign exchange reserves.</li></ul>Central banks<ul><li>Responsible for implementing monetary policies that can move currency values.</li><li>Adjust interest rates and control the money supply.</li><li>There are also instances when central banks <a href="https://www.babypips.com/forexpedia/central-bank-intervention">intervene</a>, either directly or verbally, in the forex market when they want to realign exchange rates.</li></ul>

Governments and Central Banks

Speculation in the forex market involves the buying and selling of currencies with the view of making a profit.Speculators are focused on price fluctuations.It is called speculation because of the uncertainty involved since no one can know for sure whether a currency pair’s price will go up or down.Traders assess the likelihood of either scenario before placing a trade.Two types of speculators:<ul><li>Hedge funds</li><li>Retail traders</li></ul>

The Speculators

Hedge funds and prop firms are known as the “smart money” in the forex market.These savvy traders use advanced strategies and advanced analytical tools to make educated bets on currency movements.They’re not afraid to take risks, and they often employ leverage to make their bets even bigger.

Hedge Funds and Prop Firms: The Smart Money

These are individual traders who trade currencies from their home computers, smartphones, or tablets.They may not have the deep pockets or sophisticated tools of the big players, but they’re a growing force in the forex market.They may not move the market like the big players, but they’re an essential part of the forex ecosystem.

Retail Traders: The Little Folks with Big Dreams

Retail FX trading emerged in 1970s after the Bretton Woods system, which had pegged global currencies to the US dollar, was dismantled in 1971.The resulting shift to a floating exchange rate system paved the way for increased currency speculation and the birth of the modern foreign exchange market.Back then, FX trading was like an exclusive club, with trading accessible only to banks, hedge funds, and large corporations.

The Early Days: When FX Trading Was a Members-Only Club

Once the 1990s came along, thanks to computer nerds and the booming growth of the internet, banks began creating their own trading platforms.These platforms were designed to stream live quotes to their clients so that they could instantly execute trades themselves.Meanwhile, some smart business-minded marketing machines introduced internet-based trading platforms for individual traders or “retail forex brokers“, these entities made it easy for individuals to trade by allowing smaller trade sizes.

The 1990s: Enter the Internet and a New Era of Retail FX Trading

The early 2000s saw an explosion of online brokers, each eager to offer retail FX trading services.The increased competition among brokers led to tighter spreads, lower trading costs, and an expansion of trading products beyond major currency pairs.Today, retail FX traders have access to a wide range of trading platforms even some are available in mobile phones.

The Explosion of Online Forex Brokers and Trading Platforms

The growth of retail FX trading attracted the attention of financial regulators, who sought to protect individual traders from shady forex brokers and maintain market integrity.They introduced strict rules & requirements for FX brokers, making sure they had enough capital, managed risk properly, and treated customers fairly.Prominent regulatory agencies in the retail FX industry include the US Commodity Futures Trading Commission (CFTC), the UK Financial Conduct Authority (FCA), the Australian Securities and Investments Commission (ASIC) & the European Securities and Markets Authority (ESMA).

Regulatory Evolution and the Protection of Retail Traders

Learning Forex (Preschool) - Who Trades Forex?

<a href="https://www.babypips.com/forexpedia/forex">Forex</a> market is open 24 hours a day, but that doesn’t mean it’s always active the entire day.You can make money trading when the market moves whether is up or down but you will have a very difficult time trying to make money when the market doesn’t move at all.

Forex Trading Sessions

The forex market can be broken up into four major trading sessions: <ul><li>Sydney session</li><li>Tokyo session</li><li>London session</li><li>New York session</li></ul>Traders often focus on one of the trading periods, rather than attempt to trade the markets 24 hours per day.Since New Zealand is a major financial center, the forex markets open there on Monday morning, while it is still Sunday in most of the world (it's still called Sydney Session).Other than the weekends, there are just two public holidays when the entire forex market is closed, Christmas and New Year’s Day.

Forex Market Hours

Open and close times will also vary during the months of October/November and March/April as some countries (like the United States, United Kingdom, and Australia) shift to/from daylight savings time (DST).The day of the month that a country shifts to/from DST also varies, confusing us even more.It’s important to remember that the forex market’s opening hours will change in March, April, October, and November, as countries move to daylight savings on different days.

Daylight Savings Time

Between each <a href="https://www.babypips.com/forexpedia/forex-trading">forex trading</a> session, there is a period of time where two sessions are open at the same time:<ul><li>During the summer, from 3:00-4:00 AM ET, the <a href="https://www.babypips.com/learn/forex/can-trade-forex-tokyo-session">Tokyo session</a> and <a href="https://www.babypips.com/learn/forex/london-session">London session</a> overlap</li><li>During both summer and winter from 8:00 AM-12:00 PM ET, the London session and the <a href="https://www.babypips.com/learn/forex/new-york-session">New York session</a> overlap</li></ul> Naturally, these are the busiest times during the trading day because there is more volume when two markets are open at the same time.This makes sense because, during those times, all the market participants are bustling which means more money is transferring hands.

Trading Session Overlaps

For traders living in America, the trading day actually begins on Sunday night at 5:00 pm EST (10:00 pm GMT).However, liquidity doesn’t really show up until Tokyo opens a few hours later.The opening of the Tokyo session at 12:00 am GMT marks the start of currency trading in Asia.Tokyo session is sometimes referred to as the Asian session. Pair you should pay attention:<ul><li>AUD</li><li>JPY</li><li>NZD</li><li>RMB</li></ul>Pay attention to China, Japan, Australia, New Zealand News.

Tokyo Session

London benefits from its time zone. London’s morning overlaps with late trading in Asia and London’s afternoon overlap with New York City. London it is considered the forex capital of the world.It may be best to stick with the majors (EUR/USD, GBP/USD, USD/JPY, and USD/CHF), as these normally have the tightest spreads.Also, it is these pairs that are normally directly influenced by any news reports that come out during the European session.You can also try the yen crosses (more specifically, <a href="https://marketmilk.babypips.com/watchlist/eur-pairs/symbols/EURJPY/overview">EUR/JPY</a> and <a href="https://marketmilk.babypips.com/watchlist/gbp-pairs/symbols/GBPJPY/overview">GBP/JPY</a>), as these tend to be pretty volatile at this time.

London Session

Right as European traders are getting back from their lunch breaks, the U.S. session begins at 8:00 am EST as traders start rolling into the office.The New York can actually be divided into three sessions:<ul><li>Morning session: 8am – 12pm EST</li><li>Lunch session (or lunch hour): 12pm – 1pm EST</li><li>Afternoon session: 1pm – 4pm EST</li></ul>Take note that there will be a TON of liquidity as both the U.S. and European markets will be open at the same time.This allows you to trade virtually any pair, although it would be best if you stuck to the major and minor pairs.Pay attention to US News or Data.

New York Session

Logically, you would think that this happens during the overlap between the two sessions. Check the characteristics below:Tokyo – London Overlap: <ul><li>Liquidity during this session is pretty thin for a few reasons. Typically, there isn’t as much movement during the <a href="https://www.babypips.com/school/preschool/when-can-you-trade-forex/tokyo-session.html">Asian session</a>.</li></ul>London – New York Overlap: <ul><li>Liquidity is at an optimum level around 10am and 3pm London time (10am NY time).</li><li>It is during this period where we can see some big moves, especially when news reports from the U.S. and Canada are released.</li><li>If any trends were established during the European session, we could see the trend continue.</li></ul>

Best Times of Day to Trade Forex

It’s best to trade during the middle of the week, since this is when the most action happens.Fridays are usually busy until 12:00 pm EST and then the market pretty much drops dead until it closes at 5:00 pm EST. This means we only work half-days on Fridays.The busiest times are usually the best times to trade since high volatility tends to present more opportunities.

Best Days of the Week to Trade Forex

<ul><li>Sundays – everyone is sleeping or enjoying their weekend! No activity during weekend.</li><li>Fridays – liquidity dies down during the latter part of the U.S. session.</li><li>Holidays – everybody is taking a break.</li><li>Major news events – be careful since there are sudden movements that lead you to great losses.</li><li>When the trader doesn't feel great – it would be best to wait so that your analysis or judgement doesn't get cloudy.</li></ul>

Worst Times to Trade

Learning Forex (Preschool) - When Can You Trade Forex?

As a forex trader, you are speculating on whether one currency will rise or fall in price against another currency.So “forex trading” can be defined as the process of speculating on currency prices to try and make a profit. The objective of forex trading is to exchange one currency for another in the expectation that the price will change.More specifically, the currency you bought will increase in value compared to the one you sold. An exchange rate is simply the ratio of one currency valued against another currency.

How to Make Money Trading Forex

Currencies are always in pairs, such as GBP/USD or USD/JPY.The reason they are in pairs is that, in every foreign exchange transaction, you are simultaneously buying one currency and selling another.Whenever you have an open position in forex trading, you are exchanging one currency for another. <ul><li>Base currency (The first listed currency as the reference element for the exchange rate of the currency pair. It always has a value of one)</li><li>Counter/Quote currency (The second listed currency)</li></ul>

How to Read a Forex Pairs

When buying, the exchange rate tells you how much you have to pay in units of the quote currency to buy ONE unit of the base currency.When selling, the exchange rate tells you how many units of the quote currency you get for selling ONE unit of the base currency.<ul><li>You would buy the pair if you believe the base currency will appreciate (gain value) relative to the quote currency.</li><li>You would sell the pair if you think the base currency will depreciate (lose value) relative to the quote currency.</li></ul>

Buying or Selling Currencies

If you want to buy (which actually means buy the base currency and sell the quote currency), you want the base currency to rise in value and then you would sell it back at a higher price.<ul><li>long = buy.</li></ul> If you want to sell (which actually means sell the base currency and buy the quote currency), you want the base currency to fall in value and then you would buy it back at a lower price.<ul><li>short = sell.</li></ul>

Terms in Taking and Closing Position

All forex quotes are quoted with two prices: the bid and ask.<ul><li>The bid is lower than the ask price.</li><li>The bid: Price at which your broker is willing to buy the base currency in exchange for the quote currency. </li><li>The ask or offer price: Price at which your broker will sell the base currency in exchange for the quote currency.</li><li>Spread: The difference between the bid and the ask price.</li></ul>

The Bid, Ask and Spread

Forex trading involves trying to predict which currency will rise or fall versus another currency.The supply and demand for a currency changes due to various economic factors, which drive currency exchange rates up and down. Example: EUR/USDIf you believe that the <a href="https://www.babypips.com/learn/forex/united-states-of-america">US economy</a> will continue to weaken, which is bad for the USD, you would execute a BUY EUR/USD order with the expectation that it will rise versus the USD.If you believe that the US economy is strong & the euro will weaken against the USD, you would execute a SELL EUR/USD order with the expectation that it will fall versus the USD.

Know When to Buy or Sell a Currency Pair

In forex, it would be just as foolish to buy or sell 1, so they usually come in “lots” of 100,000 units (standard lot) depending on your broker and the type of account you have.When you trade with leverage, no need to pay the 100,000 upfront. Instead, you’d put down a small “deposit” or margin.<ul><li>Leverage: ratio of the transaction size (“position size”) to the actual cash (“trading capital”) used for margin.</li><li>Margin trading lets you open large position sizes using only a fraction of the capital you’d normally need.</li></ul>You can conduct relatively large transactions with a small amount of initial capital.

Trading in “Lots”

When you decide to close a position, the deposit (“margin”) that you originally made is returned to you and a calculation of your profits or losses is done.A small margin deposit can lead to large losses as well as gains.It also means that a relatively small movement can lead to a proportionately much larger movement in the size of any loss or profit which can work against you as well as for you. When trading on margin, it’s important to be aware that your risk is based on the full value of your position size. You can quickly blow your account if you don’t understand how margin works.

Trading Using Leverage

For positions open at your broker’s “cut-off time” (usually 5:00 pm ET), there is a daily “<a href="https://www.babypips.com/forexpedia/rollover-fee">rollover fee</a>“ or “<a href="https://www.babypips.com/forexpedia/swap">swap fee</a>” that a trader either pays or earns, depending on the positions you have open.If you do not want to earn or pay interest on your positions, simply make sure they are all closed before cut-off time, the established end of the market day.Since every currency trade involves borrowing one currency to buy another, interest rollover charges are part of forex trading.<ul><li>Interest is PAID on the currency that is borrowed.</li><li>Interest is EARNED on the one that is bought.</li></ul>

Rollover

The unit of measurement to express the change in value between two currencies is called a “pip.”A pip is usually the last decimal place of a price quote.

What is a Pip in Forex?

There are forex brokers that quote currency pairs beyond the standard “4 and 2” decimal places to “5 and 3” decimal places.They are quoting FRACTIONAL PIPS, also called “points” or “pipettes.”A “point” or “pipette” or “fractional pip” is equal to a “tenth of a pip“.

What is a Pipette?

As each currency has its own relative value, it’s necessary to calculate the value of a pip for that particular currency pair. What is the pip value in terms of my trading account’s currency?Not everyone has their account denominated in the same currency.This means that the pip value will have to be translated to whatever currency our account may be traded in.Simply multiply/divide the “found pip value” by the exchange rate of your account currency and the currency in question.

How to Calculate the Value of a Pip

A “lot” is a unit measuring a transaction amount.When you place orders on your trading platform, orders are placed in sizes quoted in lots.The standard size for a lot is 100,000 units of currency, and now, there are also mini, micro, and nano lot sizes that are 10,000, 1,000, and 100 units.The change in a currency value relative to another is measured in “pips,” which is a very, very small percentage of a unit of currency’s value. Lot size depends on the account you registered in your broker.

What is a Lot in Forex?

Think of your broker as a bank who basically fronts you $100,000 to buy currencies.The amount of leverage you use will depend on your broker and what you feel comfortable with.Typically the broker will require a deposit, also known as “margin“.Once you have deposited your money, you will then be able to trade. The broker will also specify how much margin is required per position (lot) traded.Any losses or gains will be deducted or added to the remaining cash balance in your account.The minimum security (margin) for each lot will vary from broker to broker.

Leverage

Forex brokers will quote you two different prices for a currency pair: the bid and ask price.<ul><li>The “bid” is the price at which you can SELL the base currency.</li><li>The “ask” is the price at which you can BUY the base currency.</li></ul>The difference between these two prices is known as the spread. This spread is the fee for providing transaction immediacy. This is why the terms “transaction cost” and “bid-ask spread” are used interchangeably.Instead of charging a separate fee for making a trade, the cost is built into the buy and sell price of the currency pair you want to trade.

Bid/Ask Spread

The spread is usually measured in pips, which is the smallest unit of the price movement of a currency pair. For most currency pairs, one pip is equal to 0.0001.

How is the Spread in Forex Trading Measured?

The type of spreads that you’ll see on a trading platform depends on the forex broker and how they make money.There are two types of spreads:<ul><li>Fixed: usually offered by brokers that operate as a market maker or “dealing desk” model. Fixed spreads stay the same regardless of what market conditions are at any given time.</li><li>Variable (also known as “floating”): offered by brokers operating a “non-dealing desk” model. The difference between the bid and ask prices of currency pairs is constantly changing. </li></ul>

What Types of Spreads are in Forex?

Fixed spreads use a dealing desk; the broker buys large positions from their liquidity provider(s) and offers these positions in smaller sizes to traders.Pros<ul><li>Smaller capital requirements, ideal for new traders</li><li>Make calculating transaction costs more predictable</li></ul> Cons<ul><li>Requotes can occur frequently since pricing is only coming from your broker. It means the broker will “block” the trade and ask you to accept a new price. You will be “re-quoted” with a new price.</li><li>Slippage. The price that you finally end up after entering a trade will be totally different than the intended entry price.</li></ul>

Pros and Cons of Fixed Spreads

Variable spreads are offered by non-dealing desk brokers who get their pricing of currency pairs from multiple liquidity providers & pass on these prices to the trader without the intervention of a dealing desk. Spreads will widen or tighten based on the supply and demand of currencies and the overall market volatility.Pros<ul><li>No requotes since the variation in the spread factors in changes in price due to market conditions (News or Breaking News)</li><li>More transparent pricing</li></ul> Cons<ul><li>Not ideal for <a href="https://www.babypips.com/learn/forex/scalping">scalpers</a>. Spread may widen so much from profitable to unprofitable quickly.</li><li>Not friendly for new traders</li></ul>

Pros and Cons of Variable Spreads

Better with Fixed:<ul><li>Traders with smaller accounts and who trade less frequently will benefit from fixed spread pricing.</li></ul> Better with Variable:<ul><li>Traders with larger accounts who trade frequently during peak market hours (when spreads are the tightest).</li><li>Traders who want fast trade execution and need to avoid requotes.</li></ul>

Fixed vs Variable Spreads: Which is Better?

How the spread relates to actual transaction costs. You need two things:<ul><li>The value per pip</li><li>The number of lots you’re trading</li></ul>To figure out the total cost, you would multiply the cost per pip by the number of lots you’re trading.The pip cost is linear. This means that you will need to multiply the cost per pip by the number of lots you are trading.If you increase your position size, your transaction cost, which is reflected in the spread, will rise as well.

Spread Costs and Calculations

An order is an offer sent using your broker’s trading platform to open or close a transaction if the instructions specified by you are satisfied or in other words, how you will enter or exit a trade.Be sure that you know which types of orders your broker accepts.Different brokers accept different types of forex orders.Orders fall into two buckets:Market order: an order instantly executed against a price that your broker has provided. Consisting of:<ul><li>Buy</li><li>Sell</li></ul>Pending order: an order to be executed at a later time at the price you specify.<ul><li>Buy Limit</li><li>Sell Limit</li><li>Buy Stop</li><li>Sell Stop</li></ul>

Types of Forex Orders

A market order is an order to buy or sell at the best available price.Please keep in mind that depending on market conditions, there may be a difference between the price you selected and the final price that is executed (or “filled”) on your trading platform.When you place a market order, you do not have any control over what price your market order will actually be filled at. This order type ensures that the trade is executed quickly, which can be crucial in fast-moving markets.Pros:<ul><li>Fast execution</li><li>High probability of trade execution</li></ul>Cons:<ul><li>No control over the execution price</li><li>Potential slippage</li></ul>

Market Order

A limit order is an order placed to either buy below the market or sell above the market at a certain price.<ul><li>You place a “Buy Limit” order to buy at or below a specified price.</li><li>You place a “Sell Limit” order to sell at a specified price or better.</li></ul> A limit order can only be executed when the price becomes more favorable to you.<ul><li>A limit order to BUY at a price below the current market price will be executed at a price equal to or less than the specified price.</li><li>A limit order to SELL at a price above the current market price will be executed at a price equal to or more than the specific price.</li></ul>

Limit Order

A stop order “stops” an order from executing until price reaches a stop price. A stop entry order is an order placed to buy above the market or sell below the market at a certain price.<ul><li>You place a “Buy Stop” order to buy at a price above the market price, and it is triggered when the market price touches or goes through the Buy Stop price.</li><li>You place a “Sell Stop” order to sell when a specified price is reached.</li></ul> A stop order can only be executed when the price becomes less favorable to you.

Stop Entry Order

A stop loss order is a type of order linked to a trade for the purpose of preventing additional losses if the price goes against you. A stop loss order remains in effect until the position is liquidated or you cancel the stop loss order. A stop order is NOT guaranteed a specific execution price and in volatile and/or illiquid markets, may execute significantly away from its stop price. Stop orders may be triggered by a sharp move in price that might be temporary.

Stop Loss Order

A stop loss order which is always attached to an open position and which automatically moves once profit becomes equal to or higher than a level you specify.A trailing stop is a type of stop loss order attached to a trade that moves as the price fluctuates.Your stop will STAY at this new price level. It will not widen if the market goes higher against you.Once the market price hits your trailing stop price, a market order to close your position at the best available price will be sent and your position will be closed.

Trailing Stop

All of orders allow traders to tell their brokers at what price they’re willing to trade in the future.The difference lies in the purpose of the specified price<ul><li>A stop order activates an order when the market price reaches/passes a specified stop price. Think of a stop price as a threshold for your order to execute. At what exact price that your order will be filled at depends on market conditions.</li><li>A limit order can only be executed at a price equal to/better than a specified limit price. Think of a limit price as a price guarantee.  You are guaranteed to only get executed at your limit price.</li></ul>

Limit Orders vs Stop Orders

You can open a demo account for FREE with most forex brokers. These “pretend” accounts have most of the capabilities of a “real” account.The demo account allows you to learn about the mechanics of forex trading and test your trading skills and processes with ZERO risk.Do NOT open a live trading account until you are CONSISTENTLY trading PROFITABLY on a demo account.Stick with 1 of the majors because they are the most liquid which usually means tighter spreads and less chance of slippage.Plus, in the beginning, you need time to focus on improving your trading processes and creating good habits.

Demo Trade

<ul><li>All forex traders, and ALL traders, LOSE money on some trades.</li><li>Trading forex is not for the unemployed, those on low incomes, are knee-deep in credit card debt or who can’t afford to pay their electricity bill or afford to eat.</li><li>Forex Trading is NOT a Get-Rich-Quick Scheme. Forex trading is a SKILL that takes TIME to learn.</li></ul> Practice trading on a DEMO ACCOUNT until you find a method that you know inside and out, and can comfortably execute objectively.

Can You Get Rich By Trading Forex?

Learning Forex (Preschool) -  How Do You Trade Forex?

Forex is the global financial market that allows one to trade currencies.An exchange rate is the relative price of two currencies from two different countries.It’s these changes in the exchange rates that allow you to make money in the foreign exchange market.The forex market is open 24 hours a day and 5 days a week, only closing down during the weekend.

What is Forex?

The simple answer is MONEY. Specifically, currencies.The price of the currency is usually a direct reflection of the market’s opinion on the current and future health of its respective economy.In general, the exchange rate of a currency versus other currencies is a reflection of the condition of that country’s economy, compared to other economies. Major CurrenciesMost heavily traded currencies and represent some of the world’s largest economies.USD, EUR, JPY, GBP, CHF, AUD, NZD, and CAD There are HUNDREDS of currency pairs in existence but not all can be traded in the FX market

What Is Traded In Forex?

Forex trading is the simultaneous buying of 1 currency and selling of another.When you trade in the forex market, you buy or sell in currency pairs through a “forex broker” or “CFD provider”.An exchange rate is the relative price of 2 currencies from 2 different countries and it fluctuates based on which currency is stronger at the moment.Categories of currency pairs:<ul><li>The “major pairs": always include the USD</li><li>The “cross/minor pairs“: do NOT include the USD. Crosses that involve any of the major currencies</li><li>The “exotic pairs“: consist of 1 major currency and 1 currency from an emerging market (EM).</li></ul>

Currency Pairs

There are only 7 major currency pairs.Compared to the minors and exotics, the price moves more frequently with the majors, which provides more trading opportunities.<ul><li>EUR/USD	</li><li>USD/JPY	</li><li>GBP/USD	</li><li>USD/CHF</li><li>USD/CAD</li><li>AUD/USD</li><li>NZD/USD</li></ul> The majors are the most liquid in the world.Liquidity is used to describe the level of activity in the financial market.The more frequently traded something is the higher its liquidity.

Major Currency Pairs

While not as frequently traded as the majors, the crosses or minors are still pretty liquid and still provide plenty of trading opportunities. The most actively traded crosses/minors are derived from the three major non-USD currencies: EUR, JPY, and GBP.<ul><li>EUR/CHF</li><li>EUR/GBP</li><li>EUR/CAD</li><li>EUR/AUD</li><li>EUR/NZD</li><li>EUR/SEK</li><li>EUR/NOK</li><li>EUR/JPY</li><li>GBP/JPY</li><li>CHF/JPY</li><li>CAD/JPY</li><li>AUD/JPY</li><li>NZD/JPY</li><li>GBP/CHF</li><li>GBP/AUD</li><li>GBP/CAD	</li><li>GBP/NZD</li></ul> However, there are also some other pairs that still included in crosses or minors such as:<ul><li>AUD/CHF</li><li> AUD/CAD</li><li> AUD/NZD</li><li> CAD/CHF</li><li> NZD/CHF</li><li>NZD/CAD</li></ul>

Major Cross-Currency Pairs or Minor Currency Pairs

Exotic currency pairs are made up of one major currency paired with the currency of an emerging economy, such as Brazil, Mexico, Chile, Turkey, or Hungary and many others.Basically, an exotic currency pair includes one major currency alongside an exotic currency.  Due to the overall lower degree of liquidity, exotic currency pairs tend to be far more sensitive to economic and geopolitical events.For example, a political scandal or unexpected election results can cause an exotic pair’s exchange rate to swing violently.

Exotic Currency Pairs

The bulk of forex trading takes place on what’s called the “interbank market“. The forex market has neither a physical location nor a central exchange.The forex market is considered an <a href="https://www.babypips.com/forexpedia/otc">over-the-counter</a> (OTC) market because the entire market is run electronically, within a network of banks & non-bank financial institutions (NBFIs), continuously over a 24-hour period.According to the International Monetary Fund (IMF), the USD comprises roughly 62% of the world’s official foreign exchange reserves.Foreign exchange reserves are assets held on reserve by a central bank in foreign currencies.

Forex Market Size And Liquidity

The main functions of the forex market are:<ul><li>To transfer funds from 1 currency of a country to another currency.</li><li>To provide short-term credit to finance trade between countries.</li><li>To avoid or “hedge” against foreign exchange rate fluctuations from when a transaction is initiated & when payment is received.</li><li>To speculate.</li></ul> Most currency trading is based on speculation. Most of the trading volume comes from traders that buy & sell based on the short-term price movements of currency pairs.The forex market is relatively very liquid but the market depth could change based on the currency pair & time of day.

Speculation in the Forex Market

Among the financial instruments, the most popular ones are:<ul><li>retail forex</li><li>spot FX</li><li>currency futures </li><li>currency options</li><li>currency exchange-traded funds (or ETFs)</li><li>forex CFDs</li><li>forex spread betting</li></ul> Other financial instruments like <a href="https://www.babypips.com/forexpedia/fx-swap">FX swaps</a> and <a href="https://www.babypips.com/forexpedia/forward">forwards</a> are not covered since they cater to institutional traders.

How To Trade Forex

A currency future is a contract that details the price at which a currency could be bought or sold and sets a specific date for the exchange.Currency futures were created by the Chicago Mercantile Exchange (CME) way back in 1972Since futures contracts are standardized and traded on a centralized exchange, the market is very transparent and well-regulated.This means that price and transaction information are readily available. Institutional traders use this

Currency Futures

An “option” is a financial instrument that gives the buyer the right or the option, but not the obligation, to buy or sell an asset at a specified price on the option’s expiration date. If a trader “sold” an option, then he or she would be obliged to buy or sell an asset at a specific price at the expiration date. Just like futures, options are also traded on an exchange. However, the disadvantage in trading FX options is that market hours are limited for certain options and the liquidity is not nearly as great as the futures or spot market.

Currency Options

The spot FX market is an “off-exchange” market/an over-the-counter (“OTC”) market that operates 24 hours a day.A spot FX transaction is a bilateral (“between two parties”) agreement to physically exchange one currency against another currency.The agreement is a contract. This means this spot contract is a binding obligation to buy/sell a certain amount of foreign currency at a price that is the “spot exchange rate”/the current exchange rate.The delivery of what you buy/sell should be done within 2 working days and is referred to as the value date or delivery date. Institutional traders use this

Spot FX

There is a secondary OTC market that provides a way for retail traders to participate in the forex market.Forex trading providers trade in the primary OTC market on your behalf. They find the best available prices and then add a “markup” before displaying the prices on their trading platforms.Retail forex brokers let you trade with leverage which is why you can open positions valued at 50 times the amount of the initial required margin.Retail forex trading is considered speculative or make bets on (and profit from) the movement of exchange rates. Retail traders use this

Retail Forex

A CFD is a contract, typically between a CFD provider & a trader, where 1 party agrees to pay the other the difference in the value of a security, between the opening and closing of the trade.Trading forex CFDs gives you the opportunity to trade a currency pair in both directions. You can take both <a href="https://www.babypips.com/forexpedia/long">long</a> & <a href="https://www.babypips.com/forexpedia/short">short</a> positions.If the price moves in your chosen direction, you would get profit, and if it moves against you, you would get loss. Retail Forex use this to get profit for retail traders

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Fira Basitha