hello everyone. I’m a new student of forex and currently going through the school of pipsology.
i’ve already open a demo account with forex dot com. I understand the concept of leverage and margins. However, what is not yet totally clear with me is whether it is mandatory to use leverage when trading on platform such as forexdotcom. By that i mean can you use your own money to buy for example 1 standard lot and pay for it in full with your own money?
Forexdotcom doesn’t make it clear whether that’s possible or maybe i haven’t read through all their terms yet.
thanks
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Yes, although that is not normally what people want to do with a Forex account. An example. Let’s say I think the GBPUSD is headed towards 1.3500. It is now 1.3000. So I predict a 500 PIP increase - i.e. the GBP is going to become worth more USDs - to the tune of (1.3500- 1.3000)/ 1.3000 = 0.0500 / 1.3000 = 3.85%. So I open a trade to buy the GBPUSD at 1.3000 and set a stop loss at 0.0000 (that is 13,000 PIPs). I decide to risk a total of $13,000, so I am risking $1.00 per PIP. I enter at 1.3000 with a $1.00 per PIP risk. I set a take profit (TP) at 1.3500. Four weeks later, the GBPUSD goes over 1.3500. My take profit kicks in and I now have $1.00 x 500 PIPs, or $500 profit for my $13,000 risk. That is 500/13,000 or 3.85% profit. I go to the pub and proudly show my mates how I am a great Forex trader. My best mate tells me “I took a trade yesterday risking $100 and made $500. Why would I ever want to tie up $13,000 to make $500 when I can tie up $100 for the same result?”
If you wish to trade without margin, just buy USD and put them in a bank account until they are worth more than the GBP you bought them with, then change them back to GBP. No trading account needed.
Thank you for your explanation. In any case i’m not planning to trade a standard or even mini lot anytime soon completely without leverage as i simply don’t have that kind of money. But, i wanted to have a full understanding of all the ways one could trade. And also it’s out of the concern that when using leverage, if i understood it correctly, it’s possible that your account might become negative. And if that happens would that mean that you would now owe money to your trading platform? Or do most platform have a mechanism to prevent your account from going negative?
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Oh yes, they will liquidate your position before you have any negative funds with them. That is the disadvantage of over trading or over reliance on margin. As long as you always know your maximum risk on any trade, and on all open trades, you will be OK. But not a good idea to leave trades open over the weekend since there is no guarantee that the market will not gap up or gap down, and that would leave you owing more than you put in your account. Quite how they would collect that, I do not know, but it is a situation you don’t want to find yourself in anyway.
A lot of this is covered in the basic Education section School of Pipsology. Just be patient and read the material in chronological order. It will make sense as you read along.
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It’s not. Infact only experienced traders should use margin as they’ll know the risk each trade involves.