O
ne of the main essentials of Forex trading is to know how to predict which currency will rise or fall versus another currency.
The supply and demand for a currency change due to various economic factors, which drives currency exchange rates up and down.
You need to follow what happens in the country of the chosen currency you are trading, so you can predict if the rates are going up or down. The main factors that influence one country’s economy are productivity, employment, manufacturing, international trade, and interest rates.
Learn to Trade Forex
We will take as an example the currency pair NZD/USD.
In this example, the New Zealand dollar is the base currency and thus the “basis” for the buy/sell.
Let’s say that you predict that the U.S. economy will continue to weaken, which is bad for the U.S. dollar, you would execute a BUY NZD/USD order.
It means that you have bought NZD in the expectation that it will rise versus the U.S. dollar.
But if you think that the U.S. economy is strong and the NZD will weaken against the U.S. dollar, you would execute a SELL NZD/USD order.
You have sold the New Zealand Dollar in the expectation that it will fall versus the US dollar.
Let’s take another example.
USD/CHF
In this example, the U.S. dollar is the base currency and thus the “basis” for the buy/sell.
If you think that the Swiss government is unstable and the franc will weaken, you would execute a BUY USD/CHF order.
By doing so you have bought U.S dollars in the expectation that it will rise versus Swiss franc.
If you believe that Swiss are converting for some reason all their U.S. dollars back to francs, and this will hurt the U.S. dollar, you would execute a SELL USD/CHF order.
By doing so you have sold U.S dollars in the expectation that it will depreciate against the Swiss franc.
GBP/USD
Here the British pound is the base currency and thus the “basis” for the buy/sell.
If you think the British pound is going to recover after Brexit and will go higher, you would execute a BUY GBP/ USD order.
By doing so you have bought POUNDS in the expectation that it will appreciate versus the US DOLLAR.
But if you think that Brexit will continue hurting Britain’s future economic growth, which will weaken the pound, you would execute a SELL GBP/USD order.
By doing so, you have sold POUNDS in the expectation that it will depreciate against the US DOLLAR.
Trading in “Lots”
In forex, you can’t buy or sell 1 euro / pound/ dollar.
You buy “lots”. There are different kinds of lots : 1,000 units of currency (micro lot), 10,000 units (mini lot), or 100,000 units (standard lot). It depends on your broker and how much you can afford.
Margin Trading
If you don’t have enough money to cover the transaction you want to make, you will do so by
using leverage.
When you trade with leverage, you wouldn’t need to pay the 10,000 euros upfront. You just put down a small “deposit”, known as margin or a faith deposit.
Leverage is the ratio of the transaction size (“position size”) to the actual cash (“trading capital”) used for margin.
For example, 50:1 leverage, also known as a 2% margin requirement, means $2,000 of margin is required to open a position size worth $100,000.
This is how you’re able to open as much as $2,500 or $200,000 positions with as little as $50 or $4,000.
It means you are able to trade BIG with a SMALL amount of initial CAPITAL.
You believe that signals in the market are indicating that the British pound will go up against the U.S. dollar.
You open one standard lot (100,000 units GBP/USD), buying with the British pound with a 2% margin requirement.
You wait for the exchange rate to climb.
When you buy one lot (100,000 units) of GBP/USD at a price of 1.50000, you are buying 100,000 pounds, which is worth $150,000 (100,000 units of GBP * 1.50000).
Since the margin requirement was 2%, then US$3,000 would be set aside in your account to open up the trade ($150,000 * 2%).
You now control 100,000 pounds with just $3,000.
Your predictions come true and you decide to sell. You close the position at 1.50500. You earn about $500.
The deposit (“margin”) that you originally made is not a transaction cost or fee. It will be returned to you after you close the position.
This profit or loss is then credited to your account.
Let’s review the GBP/USD trade example above.
GBP/USD went up by a mere half a pence! Not even one pence. It was half a pence!
But you made $500!
But…your position size was £100,000 (or $150,000) when you opened the trade.
What’s neat is that you didn’t have to put up that entire amount.
All that was required to open the trade was $3,000 in margin.
$500 profit from $3,000 in capital is a 16.67% return!
Leverage trading is great because a small margin deposit can lead to large losses as well as gains.
Don’t forget that it could have worked against you!
You could’ve easily LOST $500 in twenty minutes as well.
High leverage is not only a good thing, it can be DANGEROUS!
For example, you open a forex trading account with a small deposit of $1,000. Your broker offers 100:1 leverage so you open a $100,000 EUR/USD position.
A move of just 100 pips will bring your account to $0! A 100-pip move is equivalent to $1000! You blew your account with a single price move of euro.
If you don’t want to blow up your account and see zero Account balance on your display, you need to know how Margin Trading works. Your risk is based on the full value of your position size.
Rollover
If you haven’t closed your positions when your broker is closing (usually 10:00 pm GMT), there is a daily “rollover fee“.
It is also known as a “swap fee” that a trader either pays or earns, depending on the positions you have open.
If you do not want to earn or pay interest on your positions, all you need to do is to close your positions before 10:00 pm GMT.
Currency trade involves borrowing one currency to buy another, therefore the interest rollover charges are different.
Interest is PAID on the currency that is borrowed.
Interest is EARNED on the one that is bought.
The net interest rate differential will be positive if you are buying a currency with a higher interest rate than the one you are borrowing, will earn interest as a result.
In the opposite, if the interest rate differential is negative then you will have to pay.
Many retail forex brokers do adjust their rollover rates based on different factors (e.g., account leverage, interbank lending rates), so if you don’t want any surprises, you need to check with your forex broker how it does a rollover.
Benchmark Interest Rates
