Interested in forex trading what is leverage margin

As individuals borrowing money, or keeping money in a bank account, we are accustomed to paying interest to the bank on borrowed money, and earning it on money on deposit. Remember, when a trader enters a forex trade, one currency is purchased while the other is sold. One way to think of this trade and a fairly accurate one is to consider the purchased currency to be owned and the sold currency to be borrowed for the duration of the trade.

Forex Leverage and Margin Explained - efulejeqih.web.fc2.com

Just as is true with interest at banks, the 'borrowed' or sold currency in the trade incurs interest charges, while the owned or bought currency earns interest.

In forex markets, the interest owning or paid is calculated only on positions held overnight with the close of day usually considered to be 5 pm North America Eastern time. If a trade is entered during a day, and exited before the end of the day, it neither earns interest nor incurs interest charges.

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What actually happens, at least in theory if not in practice, is that all forex currency trades are closed at night, and re-opened the next day. This event occurs automatically for all trades that remain open at the close of trading.

The event and practice is called 'rollover', while the net interest owned or paid is called "carry" or sometimes "roll". The interest rate paid on the purchased currency, or charged on the sold currency is based on the prevailing interest rate associated with each currency. Those rates can differ substantially. For trades held open for longer than the present day, the carry interest owned or paid can be an important consideration, and adds a dimension to forex trading for any trades held overnight.

Some traders also look to carry interest for opportunities to profit. Carry interest should be taken into consideration whenever forex traders hold currency pairs overnight. Some even consider carry to be an important ingredient of trading strategy. Consider the following, rather unrealistic and exaggerated example.

The trade at that point consists of an equal value of Australian Dollar owned, and Japanese Yen owed. Assume that the Australian interest rates are about 5. There is neither profit nor loss on the trade, that is, until the carry interest is considered.

For the year, the trader earned interest on the Australian Dollar, and paid interest on the Japanese Yen added to, and removed from the trader's trading account nightly due to rollover. At the end of the year, the Trader earned 5. Therefore, the net interest earned on the trade for the year was 5. If leverage on the account is Unfortunately, the reality is that the above example is exaggerated. In reality - both at the bank and with your forex broker-there is a spread in interest rates.

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You cannot normally borrow money and pay interest at the same interest rate that is paid when you invest funds. For that reason, the amount of carry paid is less than might otherwise be expected, and the amount charged might be higher than expected.

Other complications relate to the risk that the currency pair value will change. A relatively small unfavorable change in the currency rate can reduce or eliminate carry interest earnings. Therefore, a trader must be very cautious when looking to carry as a reliable source of earnings in forex trading. Rollover and Carry Very "interesting" The same is true of the forex market.

Interest is paid and earned on currencies traded. Carry trade can also can offer opportunities for profit. Carry Trade Carry interest should be taken into consideration whenever forex traders hold currency pairs overnight.

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Getting Started in Forex Trading As with any new venture, a reasoned approach to Charts and Quotes Understand these vital tools in the trader's kit Mechanics of Forex Trading Entering and exiting forex trades are an essential Interest and Carry Trade in Forex How interest impacts forex trading. Fundamental and Technical Analysis Which approach is right for the forex trader? Opening a Forex Account What to look for in a forex broker, and how to Risk Management This can be the difference between success and The Perfect Product for Beginner Forex Traders: Economic Calendar Forex Glossary Foreign Exchange Rates Forex Currency Trading Forex Charts Binary Options Translate.

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