Margin Trading: The secret to making quick money?
Margin trading has been described as the secret ingredient that allows traders to become obscenely rich in just months or weeks...
Margin trading is also a sure way to ruin any wealth you may have (if you do not know what you are doing.)
So what exactly is margin trading?
Suppose your want to invest in USD. You do not buy just $1 (one dollar), that's pointless, even impossible as the amonut is too small by most online brokers. You must buy "lots", for example, 1 mini lot which is the same as 10,000 units.
Let's say you want to buy 5 mini lots, ie 50,000 units (dollars).
If you do not have enough money to buy $ 50,000, but still want to buy this amount, you can execute a margin trade.
Margin trading is actually another word for borrowing money.
With just $1000 in deposits can now shop for much more, even as much as $50,000 though some forex brokers.
What is PIPS?
Pips is a central concept in foreign exchange trading. Thankfully it is easy to understand pips.
Pip is just a unit that shows the change in exchange rate (ie the change between two currencies).
NOK/USD changes from 5.6000 to 5.6001. This is a change of 1 pip (5.6001 to 5.6000).
Pip In other words, is the fourth decimal place in an exchange.
(An exception is the Japanese yen, which is pip the second decimal place. This means that all currency pairs containing JPY (Japanese Yen) has only two decimal places, for example USDJPY could be 85.25.)
NOTE: You do not calculate pip values themselves, this will all be calculated by your broker.
What is a "lot"?
In the "old days" only the wealthy traded foreign exchange. There was no micro lots or mini lots back then. If you could not afford to buy a standard lot of 100,000 units, you could just as well forget about currency trading.
Today we have several levels of lots, usually divided as follows:
1,000 units (micro lot)
10,000 units (mini lot)
100,000 units (standard lot)
In addition, there are some online brokers also offer nano lots, which is only 100 units.
Since currencies are measured in pips (the smallest change in an exchange rate), you must buy large sums before it will be possible to create a substantial profit on the trading. This is when leverage trading becomes useful.
What is leverage trading? We'll explain with an example... Imagine that your broker is willing to provide € 100,000 in tradinc capital, but all you have to pay to be allowed to trade for this wonderful amount is only a fraction of this, say € 1000 - this amount keeps online broker as collateral for the hundred thousand euros you receive. So, in the example here, the requirement for leverage of 100:1, that requires your broker that you only have 1% of the amount you wish to trade for. Get it?