The markets think the Euro is stronger than the US dollar and give it a value of 1.1000 against the US dollar value of 1. This means you can buy €1.10 for US$1.00. You think the Euro will get even stronger, so you decide to buy Euros. If you are right, the value will rise and you will be able to sell your Euros for more than you paid for them.
There is a difference between the bid (the price the broker will buy at) and ask (the price the broker will sell at) prices for the currencies. This is the broker’s margin and the reason they are able to trade without charging commission. Some banks charge commission on foreign exchange trading anyway.
The basic amount of a trade – called a ‘lot’ – is usually given as US$100,000.
If you choose to trade directly, you can trade at a margin of up to 1:200. This is a percentage of the transaction value. For example, a 1:100 margin would allow you to trade £100,000 with just £1,000 in your trading account. This allows you to make bigger gains, as a 1% change on a £100,000 trade is equal to £1,000 profit.
However, you should be aware that trading on margins can also lead to bigger losses. If you make the wrong decision and the currency moves against you, you could find yourself losing more than the balance in your trading account. Our highly experienced broker Peter Bokma uses an average margin of between 1:32 and 1:6 and never goes above 1:10.
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Some different types of trades
Offers to trade are called orders.
A market order is an offer to buy or sell at the current market price.
A limit order is an offer to buy or sell at a price, which is different from the market price. The money manager specifies the price he wishes to pay and the length of time for which he is prepared to offer that price.
A GTC order is an offer to buy or sell which is open until the broker decides to cancel it. GTC stands for Good Till Cancelled.
An example: The price for EUR/USD is 1.1752/1.1562 but the broker does not wish to pay that much for Euros. He makes a limit order to buy €1 million for 1.1700 GTC. This order offers 52 pips below the current market price and will stay open until the dealer cancels it.
A Day Order is an offer to buy or sell which stays open until the end of the trading day at 5pm local time.
A Stop Order is an offer to buy or sell at a price that is worse than market price and tells the broker to act when the price drops to that level. You could use it to protect your profits or reduce your losses. You could also use it to enter the market at a particular price.
OCO stand for ‘One Cancels Other’ and combines a limit order and a stop order. It tells your broker to sell once you have made a certain amount of profit or loss. Only one action will be taken, so if you take the profit, you cancel the stop order.
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Some simple examples of foreign currency trading
Taking a profit
1) A money manager is investing US$10,000 and €10,000 on behalf of an investor. He feels that the Euro is overvalued against the US dollar and expects the price to drop. The manager decides to sell the Euros and buy more dollars.
The Euro price drops by 2% and the manager is able to buy €10,200 with the US dollars from the trade. The investor now has US$10,000 and €10,200, a profit of €200.
2) The money manager agrees a leverage margin of 1:100 with the investor. Once again, the manager expects the value of the Euro to go down against the US dollar. The leverage margin means the investor only needs to have 1% of the transaction value in his trading account, so the manager is able to sell €1,200,000.
Once again, the price drops by 2% and the manager is able to buy €1,224,000 with the US dollars from the trade. The investor now has US$10,000 and €24,000, a profit of €13,800.
Taking a loss
3) The money manager continues to invest on behalf of the investor. Yet again, he expects the value of the Euro to go down against the US dollar. He decides to sell the €24,000 and buy US dollars.
This time he is wrong and the Euro price rises by 2%. The investor now has to decide whether to keep the dollars and hope the Euro price drops in the future, or buy back €23,520, a loss of €480.
For more examples, click here.
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Margin Watcher
To protect you from the risk of losing more than the money in your trading account, our broker AC-markets offers a margin watching service. This guarantees that if the markets move against you, you cannot lose more than the amount in your trading account. If the margin drops to the balance in your trading account, the system automatically settles the trade to stop you losing any more money.
Some banks and brokers do not offer a margin watching service and hold their clients liable for the entire amount of the loss.
As a further protection, Forex Invest Online LLC also recommends that you use the services of our professional foreign exchange trader. It is important that you establish the level of risk you are prepared to accept when you starting trading with our money manager..
Introduction