I’ve 2 newbie questions after learn some lessons from the Forex School:
1.Suppose I’ve 100 USD with 1:100 leverage it says that I can make transaction up to 10000 USD. My question is from where the rest 9900 USD? I’m not sure the dealer kind enough to give me more money.
2.Forex School said that Forex much better than Stocks, but why do so many people still dealing with Stocks?
In forex you’re borrowing the currency you are shorting and depositing the currency you are going long, which is why you pay or receive the interest differential. The margin deposit is simply a protection to make sure the broker isn’t harmed by customer losses.
2.Forex School said that Forex much better than Stocks, but why do so many people still dealing with Stocks?
Different markets are best for different people. I’ve enjoyed forex trading for years, but have traded stocks even longer and will keep doing so. Stocks are still what most people think of when they hear the term “trading” and it’s a market that is easy for them to understand.
Forex is not regulated…that is why stocks are safer for people 
But you can make a crap load of money if you hit the right trade with forex.
Thank you for the answer but I’m still not understand about the leverage. If the broker required a one percent margin. This means for every USD 10,000 the brokers just want USD 100 as a deposit. Why do they just need USD 100 from me? I just have USD 100 but I can buy other currencies up to USD 10,000 from where the rest USD 9900 in order to buy other currencies up to USD 10,000?
You shouldn’t think of it as you putting up 100 and the other 9900 coming from somewhere else. Retail forex trading doesn’t work the same as stocks or buying a house.
Let’s say you go long 10,000 USD/JPY at 120. In that trade you are borrowing 1,200,000 JPY (10,000 x 120). For doing so you will have to pay interest on that loan at the overnight JPY rate. You then convert the JPY to USD and deposit the proceeds, for which you will earn interest at the USD rate. When you close the trade, you take the funds on deposit, covert the USD back to JPY and pay off the loan. Whatever’s left is your profit or loss.
At no point do you use your own money in the process. Your margin deposit is nothing more than a surety against losses on the position.
The futures markets basically the same way.
Actually it works like this:
you have 1000$ in your account as margin.
You don’t trade with your money but with the money of your broker. The broker lends you 10000$, and he wants ( if i is a 1:100 leverage ) 100 as a “deposit” , a sign of good will from you, with whom you are actually saying : Sir i need 10000 because i think EUR/USD is going up, would you lend them to me? and he says: Yeah , no problem; leave on the table 100$ as a sign of good will, and after your trade is closed bring me back the 10000 i lended you. You need to pay interest on the 10000$ i’m lending you!
In the virtual world, where we live and trade, it is all made simple by a click on a buy or sell button. Keep in mind that your margin is there to deduct or increase ( immediately) the losses or profits.
the idea of paying interest really does scare me! i actually thought that if, say, i bought GBP/USD (and my account was in GBP) and therefore going long, that my broker would pay ME interest. Whereas only if i short GBP/USD then i pay my broker interest - this i understand. You are saying “For doing so you will have to pay interest on that loan at the overnight…”. Would you mind clarifying, sorry if it’s a silly question.
the idea of paying interest really does scare me! Would you mind clarifying, sorry if it’s a silly question.
There is one thing that you seem not to understand.
A pair is made of two currencies, in your example GBP/USD.
This means that you or buy GBP or buy USD, in other words you go SHORT in gbp/usd or LONG in gbp/usd.
When you sell GBP ( for example 1000 units) you pay interest ( the current rate is 5.5 % i think ). SIMULTANEOUSLY you buy dollars ( given an exchange rate of 2,0000…1000gbp=2000$ ) and you GET PAID interest on the dollars you bought , so you get interest on the 2000$ ( at a rate of 5.25%)…i’m not in the mood to do all the math, srry.
So if you don’t want to pay interest or you are afraid of interest you should only go long in this pair.
what you have at the end of the day is NET of interest rate differentials.
now you can check out this link and play around with the interest rate calculator and see what happens wich every pair weather you go long or shot on different ammounts of units for different lenghts of time.
OANDA FXTrade - FXMath
( THIS IS NOT INTENDED AS PROMOTION )
hope this helps.
Gl m8
thanks D@T, that’s really kind of you thanks for the really useful link also.
sorry, it’s just occured to me after looking at the calculator, if one decided to go short on, say GBP/USD, how is one ever to actually make a profit when the broker deducts the interest they are owed after you close your position?
interest is bound on the nuber of units you buy/ sell. the interest of 1000 units will be smaller than the interest of 100.000 units. The pip value will be different as well , for 1000 units it will be ( gbp/usd for example) 0.1$ per pip, where as for 100.000 it will be 10$ per pis. Now if you have 1000 units and pay interest for the day at a rate of 5% for example , you owe your broker aproximately 0,05 dollars, and that is less than a pip. Beware of the fact that different pairs have different INTEREST RATE DIFFERENTIALS. Aud/Jpy, for example has a high yelding interest if you go LONG in the pair ( that is called carry trading) where as, if you go short you pay a LOT of interest ( in terms of real $).,
GL, m8
thanks again D@t for all your help you know when you say “interest is bound on the number of units you buy/sell” does that mean the broker (Oanda, say) already factor in the interest borrowed/owed when you open the position? or does one have to pay the broker the interest owed at the end, when you close a position?
interest rates are different for each pair, that is what i meant. Interest depends on time as well. That means that if you hold a position for one day you get 0,05 interest, and if you keep the position for 2 days you get 0,10 interest. Most brokers use the “ROLLOVER OF INTEREST”, hat means that each day at a definite time ( usally 5p.m. US time, when business day ends) they charge your account for the interest you owe them and they add the interest they owe you. Once you close the trade ( if after 5p.m.) the interest has been alredy rolled (added or substracted) and it rolls to the next day. Onda on the other hand pays interest by the second. That means that you pay or get paid interest based on the time you held a trade. If you traded 10 min you get/pay interest for 10 min, if you held a trade f 1678 hours you get/pay interest for that ammount.
Usually when you have to pay interest it is better to pay interest by the second because once 5p.m. has passed you have to pay interest for the nex day anyway. Where as of you get paid, the opposite is true.
hope it helps,
gl m8
thanks D@T, thanks for all your time and patience also
I got it clearly now. Many thanks for the answer