Published in 1998 and provided here for historical purposes only.
Foreword
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Foreword
Updated on: Mon, March 12, 2012, 10:59 (PST)
| Remittance | Buying | Selling | Trends |
| USD | 90.60 | 91.10 |  |
| KUWA | 322.23 | 327.36 | |
| GBP | 141.18 | 142.46 | |
| SR | 24.08 | 24.29 | |
| UAE | 24.60 | 24.80 | |
| AUS | 94.49 | 96.81 | |
| EUR | 117.92 | 119.03 | |
| CAD | 90.55 | 91.89 | |
| HONG | 11.51 | 11.69 | |
| IND | 1.72 | 1.82 |  |
| JPY | 1.0921 | 1.1021 |
What is difference Used Margin and Usable Margin in Forex?
Used Margin is the amount you set aside to keep trades open. It is like a good faith deposit.
Usable Margin is what you have leftover in your account to guard against losses on the trade.
You will receive a margin call when your usable margin goes to 0. How does Usable Margin decrease? This can happen one of two ways. 1) Losses on an open position will decrease your usable margin. 2) Opening new positions will set aside more of your usable margin as used margin.
Here's an example supposing you start with $5,000 in your account. You open a trade using which requires $1,000 in Used Margin. This leaves you with $4,000 in Usable Margin. If you sustain $4,000 in losses on your open trade, a margin call will occur.
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Usable Margin is what you have leftover in your account to guard against losses on the trade.
You will receive a margin call when your usable margin goes to 0. How does Usable Margin decrease? This can happen one of two ways. 1) Losses on an open position will decrease your usable margin. 2) Opening new positions will set aside more of your usable margin as used margin.
Here's an example supposing you start with $5,000 in your account. You open a trade using which requires $1,000 in Used Margin. This leaves you with $4,000 in Usable Margin. If you sustain $4,000 in losses on your open trade, a margin call will occur.
How does margin trading in the forex market work?
When an investor uses a margin account, he or she is essentially borrowing to increase the possible return on investment. Most often, investors use margin accounts when they want to invest in equities by using the leverage of borrowed money to control a larger position than the amount they'd otherwise by able to control with their own invested capital. These margin accounts are operated by the investor's broker and are settled daily in cash. But margin accounts are not limited to equities - they are also used by currency traders in the forex market.
Investors interested in trading in the forex markets must first sign up with either a regular broker or an online forex discount broker. Once an investor finds a proper broker, a margin account must be set up. A forex margin account is very similar to an equities margin account - the investor is taking a short-term loan from the broker. The loan is equal to the amount of leverage the investor is taking on.
Before the investor can place a trade, he or she must first deposit money into the margin account. The amount that needs to be deposited depends on the margin percentage that is agreed upon between the investor and the broker. For accounts that will be trading in 100,000 currency units or more, the margin percentage is usually either 1% or 2%. So, for an investor who wants to trade $100,000, a 1% margin would mean that $1,000 needs to be deposited into the account. The remaining 99% is provided by the broker. No interest is paid directly on this borrowed amount, but if the investor does not close his or her position before the delivery date, it will have to be rolled over, and interest may be charged depending on the investor's position (long or short) and the short-term interest rates of the underlying currencies.
In a margin account, the broker uses the $1,000 as security. If the investor's position worsens and his or her losses approach $1,000, the broker may initiate a margin call. When this occurs, the broker will usually instruct the investor to either deposit more money into the account or to close out the position to limit the risk to both parties.
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Investors interested in trading in the forex markets must first sign up with either a regular broker or an online forex discount broker. Once an investor finds a proper broker, a margin account must be set up. A forex margin account is very similar to an equities margin account - the investor is taking a short-term loan from the broker. The loan is equal to the amount of leverage the investor is taking on.
Before the investor can place a trade, he or she must first deposit money into the margin account. The amount that needs to be deposited depends on the margin percentage that is agreed upon between the investor and the broker. For accounts that will be trading in 100,000 currency units or more, the margin percentage is usually either 1% or 2%. So, for an investor who wants to trade $100,000, a 1% margin would mean that $1,000 needs to be deposited into the account. The remaining 99% is provided by the broker. No interest is paid directly on this borrowed amount, but if the investor does not close his or her position before the delivery date, it will have to be rolled over, and interest may be charged depending on the investor's position (long or short) and the short-term interest rates of the underlying currencies.
In a margin account, the broker uses the $1,000 as security. If the investor's position worsens and his or her losses approach $1,000, the broker may initiate a margin call. When this occurs, the broker will usually instruct the investor to either deposit more money into the account or to close out the position to limit the risk to both parties.
What is Forex?
FOREX — the foreign exchange market or currency market or Forex is the market where one currency is traded for another. It is one of the largest markets in the world.
Some of the participants in this market are simply seeking to exchange a foreign currency for their own, like multinational corporations which must pay wages and other expenses in different nations than they sell products in. However, a large part of the market is made up of currency traders, who speculate on movements in exchange rates, much like others would speculate on movements of stock prices. Currency traders try to take advantage of even small fluctuations in exchange rates.
In the foreign exchange market there is little or no 'inside information'. Exchange rate fluctuations are usually caused by actual monetary flows as well as anticipations on global macroeconomic conditions. Significant news is released publicly so, at least in theory, everyone in the world receives the same news at the same time.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX currency is expressed. For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.2045 dollar.
Unlike stocks and futures exchange, foreign exchange is indeed an interbank, over-the-counter (OTC) market which means there is no single universal exchange for specific currency pair. The foreign exchange market operates 24 hours per day throughout the week between individuals with Forex brokers, brokers with banks, and banks with banks. If the European session is ended the Asian session or US session will start, so all world currencies can be continually in trade. Traders can react to news when it breaks, rather than waiting for the market to open, as is the case with most other markets.
Average daily international foreign exchange trading volume was $4.0 trillion in April 2010 according to the BIS triennial report.
Like any market there is a bid/offer spread (difference between buying price and selling price). On major currency crosses, the difference between the price at which a market maker will sell ("ask", or "offer") to a wholesale customer and the price at which the same market-maker will buy ("bid") from the same wholesale customer is minimal, usually only 1 or 2 pips. In the EUR/USD price of 1.4238 a pip would be the '8' at the end. So the bid/ask quote of EUR/USD might be 1.4238/1.4239.
This, of course, does not apply to retail customers. Most individual currency speculators will trade using a broker which will typically have a spread marked up to say 3-20 pips (so in our example 1.4237/1.4239 or 1.423/1.425). The broker will give their clients often huge amounts of margin, thereby facilitating clients spending more money on the bid/ask spread. The brokers are not regulated by the U.S. Securities and Exchange Commission (since they do not sell securities), so they are not bound by the same margin limits as stock brokerages. They do not typically charge margin interest, however since currency trades must be settled in 2 days, they will "resettle" open positions (again collecting the bid/ask spread).
Individual currency speculators can work during the day and trade in the evenings, taking advantage of the market's 24 hours long trading day.
If you want to know more about how to start trading in Forex, please, proceed to our Forex for dummiesarticle.
