Academy

Margin trading is originally a hedging financial arrangement, in which buyers and sellers provide “margin”, a certain amount of deposit, to guarantee the fulfillment of future contracts. Therefore, margin trading usually has leverage effect, which means it will amplify the amount of capital you have. At present, many banks and brokers also offer leverage arrangement, so that investors can have a better use, in an efficient and flexible way, of their capital. Based on this trading method, a variety of financial products with “margin” trading are invented, such as futures, options, forex, contracts for differences (forex, stocks, stock indexes, commodities, cryptocurrency, etc).

Most of the online forex transactions are carried out by margin trading. In fact, when we talk about leverage effect or leverage ratio or margin rate, they all refer to the same thing- “leverage”. Investors establish and maintain a whole contract without making full payment. They only need to deposit a certain portion of money as “margin”, and that’s how leverage works.

The use of leverage is derived from margin trading. It comes from the fact that both the buyer and the seller deposit “margin” as a guarantee to fulfill the contract in the future. Since margin is mostly calculated as a proportion of the contract size amount, that proportion is the “leverage concept”.

Overnight interest is a term commonly used in online forex trading. Rollover, swap fee, overnight funding, in fact, all refer to the same thing. Generally, if the investor has an open position at 5 PM EST (summertime), there will be the overnight interest “cost” as settlement occurred. Such “interest” includes the “rate differential” of that trading product (currency pair) as well as the financing cost of the trading platform.

New investors should be aware of the difference between the bid price and the ask price of those currency pairs in FX trading. This is just a normal market condition. For example in the stock trading, in the real time streaming quotes of the stocks, there is also a difference between bid-ask prices.

Once you’ve looked at the idea of “pip” in forex trading, you should also pay attention to the value of each pip, so called pip value. Because forex trading involves different currency pairs, investors will find that the profit and loss for each pip of some currency pairs are different from those of others. Therefore, it is necessary for investors to calculate the actual profit and loss per pip more accurately before the trade order placing, in order to avoid strategies mistaken.

“Spread” refers to the difference between the bid and ask price of a currency pair in forex trading. The widening or narrowing of the spread is directly related to the cost of investors in the trades. This cost is not paid directly, but is hidden and latent. When the spread is wide, investors may not be able to buy or sell at the best market price regardless of whether they enter or leave the market. In other words, it is a cost that affects the room of profit of investors.

Slippage refers to the situation in the trade where the difference occurs between the expected price and the actual executed price, no matter it is a market order, a take-profit order, a stop loss order or any entry order. When a pending order in the trading platform is triggered and then the order is sent into the market, it will automatically look for the best price according to the trading logic in the market. But at that moment, once the market price changes, even slightly, the actual executed price of that order may differ from the intended price. This difference in execution is called “slippage”.

In financial markets, like in the stock trading, that’s not difficult for investors to understand “one-way” trading, which means that “buy low and sell high”. Investors can only make profit when prices rise.