Forex(foreign exchange) Market Effects

If so traders interested in Forex Trading is mostly due to the leverage that characterized trading in the foreign exchange market. Through the leverage effect ( "leverage" ), speculators can significantly increase their return on investment. In conducting operations to leverage or margin transactions, the trader does not need to invest himself the full amount of the transaction. It may therefore hold positions whose value is much higher than the balance of his account. Finotec customers can place orders in an amount up to 200 times greater than their investment.

Foreign Exchange Market, forex or FX, is by definition a market leverage. In fact, the leverage associated with it is far more important than that offered in other markets such as financial markets or markets.

Unlike stocks whose prices can vary up to 5%, sometimes even 10% in one day, the degree of volatility of currencies rarely exceeds the threshold of 1% per day. In the world of forex, a variation of one cent (which represents around 100 points) of the value of a currency is seen as a movement rather significant. When dealing with currencies, leverage allows you to make big profits from changes in market relatively low. Indeed, it would not make much sense to deal with foreign currency a few thousand dollars and no leverage since profits (if any) would be low. Anyway, the currency traded generally by lot (the amount of a standard lot of 100 000 $) and you can not perform transactions with less.

Example:

A client has $ 1,000 in his margin account. He bought a lot ($ 100 000) GBP / USD rate of 1.9750 using the leverage up to 200:1. The margin used is $ 500. (100 000: 200)If the market moves in his favor, and that the rate is 1.9850 (which represents a variation of 100 points), he made a profit of $ 1 000 (100 points x $ 10 per point). It has doubled its capital to start (balance of $ 1,000 + $ 1,000 gain). He has made a profit of 200% margin (investment) of $ 500 and a 100% return on its balance of $1,000.

If the market moves against him, and that the rate down 20 points at 1.9730, the customer loses $ 200 (20 points x $ 10 per point). It has now a capital of $ 800 (1 $ 000 - $ 200) in his account.

Assume that the rate has dropped by 60 points (which represents a change to the disadvantage of the client) to 1.9690. The broker has launched a margin call (he asks the customer to add funds to replenish its cover). If the client does not replenishes his account and margin used, the broker closes the position since the customer has enough money to cover the margin requirement. As soon as its available margin falls below the margin requirement (ie $ 500 in this example), the position is closed to avoid large losses. In this case, the trader loses $ 500, or 50% of its capital. The balance of his account is now $ 500.