I am just beginning my adventure in forex and started reading some of the articles in the school of pipsology.
My question is with regards to interest on margin.
If and when I do select a broker (which is becoming a difficult task in itself), I only plan on depositing anywhere between $1000 to $5000. If I start off with 1k, and to make the math simple, I have a leverage of 100:1, am I charged interest on any money above my 1k that I used in a particular trade?
My idea as of now is to hold a trade for several weeks and possibly months. What concerns me is that if interest is charged, it may end up eating up any profits.
Also, is it even wise for me to start off with 1k in my account?
Interest charged (or paid) is not related to leverage or margin.
Interest is charged AND paid on a position which remains open at your broker’s roll-over time each day, and it is calculated on the value of your position, regardless of leverage.
Example: you buy one mini-lot of the EUR/USD. As you know by now, when you make this transaction, you are buying 10,000 euro and you are selling the dollar-equivalent of those 10,000 euro. Let’s say that your broker rolls open positions over (into the next trading day) at 5pm every day. And let’s say that at 5 pm today the price of the EUR/USD is 1.4600. That means that 1 euro = $1.46, and your 1-mini-lot position is worth 10,000 euro or $14,600.
Your broker will pay you interest on 10,000 euro at an interest rate determined by prevailing rates in the E.U. And he will charge you interest on $14,600 at an interest rate determined by prevailing rates in the U.S. So, every day, at the roll-over time, you will be paid interest, and you will be charged interest.
Whether this results in a net credit or a net debit to your account depends on the interest rates in the countries involved. For some pairs, you may find that the interest paid exactly offsets the interest charged. For other pairs, you might be paid interest if you hold a LONG position past the roll-over time, and be charged interest if you hold a SHORT position past the roll-over time — or vice versa.
As for the amount you should use to fund your first account, you should start off as small as possible, and trade tiny positions. Find a broker who will let you open an account with $250, or even $100, and then trade one micro-lot, or less, per trade. When you have learned how to make money, rather than lose money, in this tiny starter account, then you will be ready to consider funding a larger account.
You will either be charged interest or you’ll earn interest, it depends on the pair you’re trading and which direction you’re trading it.
I wouldn’t worry about it though, the interest amounts will be tiny. I took a trade this week on GBP/USD, held it for a little over 24 hours, and the interest charged was about 20 cents per $10,000 traded.
Also, your interest has nothing to do with your leverage, it’s figured by the size of your trade. The interest on 1 lot is the same whether you have 1:1 leverage or 500:1 leverage.
And there is no problem starting an account with $1000. I opened my first account with $50! Just choose a broker that offers micro accounts and fractional lots. I suggest Oanda or IBFX.
[B]Nitpick[/B] (:)): Actually it’s E.Z. (Eurozone), not E.U. (European Union). The former includes all members of the common currency (euro). The latter includes others like the U.K. and some of the Eastern European countries that are not (yet) part of the single currency regime.
Thank you for everyone’s replies. One of the things I notice people mention most is how they trade more frequently in the forex market when compared to other markets. As of yet, I have not heard of anyone holding onto a position for more than 2 days.
Is it even possible to hold onto a position for say a month or more?
My calculations show that a GBP/USD trade of 1 micro lot (with a $1000 account you’ll be trading micro lots) held for 3 months will be somewhere around $1.75.
Keep in mind you’ll need to multiply that by the number of lots you’re actually trading, and remember you won’t always be losing that money, sometimes you’ll be gaining it.
I actually tend to do better on my position trades (hold them weeks) than on my shorter-term stuff. It’s even better when the carry is strongly in your favor.
What I did not understand here is that why should the broker charge /pay me interest when he rollovers my position? What is this interest actually? Please explain…
Thank you.
