Qesustions on the loan

Just a few qeustions

  1. Who give’s you the loan when trading on leverage the broker or the bank?

  2. If it’s the broker where do they get the money from, the bank?

  3. Is there inerest paid on than loan if so who pays it and how is it paid.

Thanx

there is no loan

basically the way it works is

you have a balance of 10000 for example

you want to trade 1.0 lot which is the equivilant of �10 per pip price movement

if the trade goes against you by 10 pips you will loose �100 + the spread lets say the spread is 3pip so depending if you include the spread in the 10 pips the totall balance left will be �9900- if you went the other way and got it right and you won 10 pips your balance would be �10100

basically they just take the diffrence

now lets say you over leverage (Leverage is important when your money managment is concerned look up Babpips school on here )

and you bet 10.0 lots thats = �100 per pip

10 pips = 1000

you would either be 1000 +or - based on 10 pip win or loss

so there is no loan they just take the diffrence from your account balance or add it to your account balance

hope i have helped

i confuse myself at times hehe

Im a slow one so you have to be patient with me.

If i put 10000 into my account and the leverage is 100-1 that would be 100000 so now i would buy 1 whole lot,but where am i getting the extra 90000 from to buy a whole lot if i only put 10000 into my account thanx again.

ok, 1:100 leveradge means for every pound you have physically in your account you can trade upto 100 times that

so 10000 would be 10000000

lets make it simple saving all the 0’s

i have �100 in my trading account i have 100 to 1 leveradge that means i have the ability to trade upto 100 times on any given currency “NOT THAT YOU HAVE TO USE ALL THAT LEVERADGE PLEASE DONT” the reason i say that is because even thoe your win could be multiplyed by loads your losses if your unlucky will also be hudge to

any way on �100 in your account you could trade upto �1000 on forex which is the equvilant to �1 per pip gained or lost

if you did do that, you would be reducing your chances of winning on such a high leveradge because if your trade went against you 100 pips ACCOUNT BLOWN trust me we have all been there, its not nice however betting lets says 0.01 (MICRO LOT) 10p per pip chances are you would never see a margin call

margin call = when the broker sees your running out of money your trade will be closed or you have to put more in, half the time you would have time to put more money in you would simply lose

so on a �1000 balance account you could max bet 1 full lot equivilant to �10 per pip but the leveradge is the same so 100 pips later against you, your trade and money have gone

beware most broker call automaticly a moargin at 80% of your account balance

ie 100 account ballance you trade 0.1 or �1.00 per pip 80 pips later you trade is lost

the point behind leveradge is you do not have to use the maximum set, its up to you how much of it you use, but bare in mind the more you use the riskier it is

most banks at most use 10 to 1 leveradge to give you an idea of whats normall

If you’re a retail forex trader then there is no loan. No actual money is changing hands, your trade is just balanced with someone else’s opposite trade and the broker pays the winner and takes money from the loser.

That’s how they can offer such huge leverages. They don’t really give that money to anyone. :slight_smile:

Retail spot forex trading is almost exactly like futures trading. You aren’t actually exchanging currencies, just agreeing to do so in the near future. Of course that near future doesn"t come because either you close out the position or your broker rolls you forward.

That said, here’s the basis for the position you’re taking, using a long USD/JPY trade.

Borrow JPY -> Convert to USD -> Deposit USD

Since you have a JPY loan you have to pay interest on that balance, but at the same time you’re receiving interest on the USD balance. That’s where the carry comes from. Since you’re borrowing and depositing the same amount there’s no real net loan, but obviously there’s an exchange rate risk. Your margin covers that.

I think the answer that nobody really wants to say is that the money is plain and simple made up.

There’s lots of associated rules and regulations that give the illusion that it is real, but it’s really our belief that it’s real that makes it kind of real. Since everyone believes in it, then I guess you could argue that it is real.

But since those rules can only be efficiently applied at best, once per day (on rollover), then you are free to use all that money to your advantage at no cost. All you have to do is close your position before the designated rollover time!

And don’t fret about the fact that it’s made up, pretty much everything in our society is fabricated from nothing, but works because everyone (or nearly everyone) believes in it. Actually that’s how trends work too :wink:

Here’s something I posted on another forum a couple of years ago. It’s relevant to the topic of this thread.

The example described below was written from the perspective of a U.S. trader, with a forex account denominated in U.S. dollars, dealing with a U.S. bank.

I’ve updated the prices to make them current.


[B]WHAT, EXACTLY, DID YOU JUST DO? [/B]

Let’s say you have a modest forex trading account. And let’s say you buy one mini-lot of the GBP/JPY (British pound/Japanese yen). What, exactly, did you just do?

Most forex traders would say that you just bought 10,000 British pounds sterling (that’s what the Brits call their currency), and you just sold 1,574,000 Japanese yen.

Say, what?!

At today’s prices, 10,000 pounds are worth about $16,500. But, you don’t have $16,500. So, how did you buy those pounds?

And, as for those 1,574,000 yen that you “sold” — you don’t even own any yen! So, how can you sell yen that you don’t own?

What’s really going on here?

With one click of your mouse, you initiated a complex transaction involving U.S. dollars, British pounds, Japanese yen, your broker, yourself, and a big bank somewhere. The transaction looks so simple, and it’s so easy to execute, because all of that complexity is hidden from view. Let’s look behind the curtain.

Imagine that you go to your local bank; you explain your GBP/JPY transaction to the manager; and you ask the bank to offer you the same deal that you got from your forex broker.

Your side of the conversation with the bank manager might go something like this:

Yes, Hi!

I’d like to buy and sell some currency. I think the Great British pound is going higher against the Japanese yen, so I want to buy some pounds and sell some yen.

First, I want to buy 10,000 pounds. Yes, I know that’s $16,500 worth of pounds; but, you see, I don’t have $16,500. All I have is a few hundred dollars.

But, hear me out.

I also want to sell 1,574,000 Japanese yen. But, the thing is, I don’t actually have any yen.

So, here’s what I’m thinking:

You LEND me the yen. I’ll use the yen to buy the pounds. And you can keep the pounds in your vault, until I come back.

That way, I don’t actually have to pay for anything; and you aren’t at risk of losing the pounds or the yen, because you have them all locked up right here in your vault.

Then, whenever I feel like it, I’ll return and sell the pounds back to you, and I’ll request payment in yen. Then, I’ll use those yen to repay the yen I borrowed from you!

Pretty cool, huh?

Also, If I get more than 1,574,000 yen when I sell my pounds back to you, then I’ll get to keep the difference.

On the other hand, if I get less than 1,574,000 yen for my pounds, then I will make up the difference out of my own funds.

In order to cover any losses I might take in this transaction, I’m willing to open a small account here in your bank — say, a few hundred dollars.

Finally, I’m willing to pay you a small fee for doing this transaction for me — I think $7 would be adequate. Call it a “spread”, or a “commission”, or whatever. You can charge it to my account.

So, that’s the deal! What do you say, are you in?

Oh, just one other thing. I know you’re going to charge me interest on the yen I’m borrowing from you, and that’s okay. But, they have pretty low interest rates in Japan; so, I want you to charge me low interest on those yen.

And, since I actually own the 10,000 pounds you’re holding for me in your vault, and I’m actually LENDING THEM TO YOU, I want you to PAY me interest on the pounds. And since they have higher interest rates in Great Britain, I want you to pay me high interest on those pounds.

So, every day, you’ll be charging me low interest on the yen, and paying me high interest on the pounds; so, the longer I keep this transaction open, the more money I’ll make in interest.

Well, I guess that’s it! Do you have some papers you want me to sign?

So, do you think your local bank manager would take this deal? I don’t think so, either.

But, this is essentially the deal you can make anytime, night or day, five and a half days per week, online, through your forex broker.

Isn’t it amazing what you can do with other people’s money?


Clint