FOREX Questions - Noob

[BigBubba]

Hello all,

I have read the FAQs... mostly... and the articles mentioned.

Now I have a practice account with interbankfx as a mini/$3000 account.

Firstly, I know that I didn't wait until I understood all things but it's virtual money and there's other demo accounts that can be used later. This will give a visual to go with the stuff that I read about.

Questions:

1 - In the Interbankfx software, I don't have a place clearly marked as portfolio, positions, and balance. It's hard to see what's where. So when I buy something I don't know which currencies are held and which are not anymore.

2 - A Lot is $100,000. What does that mean. Does that means $100,000 USD worth of currency pair or does that mean 100,000 of base currency units?

3 - Orders say vol. .01 to 7. There help says it's Lots. So volume of 1 is 1 Lot and 0.01 is 0.01 Lot?

4 - When placing order, it doesn't show total cost like the equity broker does (Ameritrade). Is it common for FOREX or just interbankfx. And so it's not easy to how much a lot costs overall and how much is coming from margin and how much is from the deposit. It's hard to manage it if it's not being shown. "It" referring to money.

Thanks.

[wolf825]

Hi Bigbubba!
Welcome to Forex...glad to have you join in on the furious fun of this kind of trading. I hope you enjoy it as much as the rest of us. I'm sure you have checked out www.babypips.com to get an overview of how Forex works--if not give it a glance as the lessons there are free and very detailed...

I will answer a couple of your questions and let others who have recent InterbankFX experience chime in...

Question #2: First of all, A Lot--that is a fixed amount of the currency you are buying or selling--if its $100,000.00 Lot bought of GBP--that is $100,000 in GBP at the time of the purchase--the value at the time. If you are buying Yen, that is $100,000 dollars value in Yen...if its Francs--then its 100,000 value of Francs..if its USD--its 100,000 of USD...and so on. You will often see it displayed as the Yen or Franc or GBP exchange rate on the currency...

I like to use this analogy when describing Lots--Think of a Lot as an Ounce of Gold--when you trade in Forex, think of the Lot as a fixed ounce of Gold, it has a fixed value at the time you initiate the trade, but the actual SIZE of that ounce will never change. So when you buy a single Lot in Forex--you are buying a set value of that currency. Now what happens with the ounce of Gold above--well nothing--it never stops being a fixed ounce of Gold...but what does change is its VALUE. When you trade in Forex--you are in essence "borrowing" that ounce of gold...or borrowing that Lot of currency--based on your account leverage. Now what happens is if the market deems the price to go up--the value of that gold goes up. When you sell it back or close the trade what happens is you are selling back that fixed value of $100,000...the DIFFERENCE in value from when you purchased it to when you sell it back is what you get to keep (YAY!) or what you have to make up for out of your account (boo!). An example back to the ounce you have borrowed--say you get that ounce in your posession at $585.00 for one ounce--the price shoots up to $685 for that same ounce. Your broker has a trade amount you owe him--that $585..that is all he needs back from you. That extra $100--that is your profit on the trade--and it will be leveraged DOWN and added to your account money.

Now if the price went from $585 to $485--your broker still wants his $585 he lent you back--so you have to make up that $100 difference using the leveraged money in your account. You don't owe him $100--you owe him the $100 based on the leverage ratio, from your account. In a 100:1 leverage scenario where you traded a $100,000 Lot at 100:1, you put up $1000 of your own money for the trade--if the price falls and the value is now only $99,900.00 you owe him $100 in leveraged funds--that would be $1...and he takes that out of your account to square it up. If it fell to where it was only worth 90,000---then it has fallen $1000 dollars in value--or $100 you owe him in a 100:1 ratio...

Some more on Leverage: When you BUY or SELL in Forex--you are not really taking posession of that amount of Lot money--your real account money is being used to LEVERAGE that amount of money in your trade. Your broker holds onto that money in earnst--and as long as you maintain that amount or the minimum required, your trade can stay open and active. Depending on your leverage amount, that money will be put aside from your account for the trade duration and how long it can stay open will depend on how much of your account balance you have to "put aside" for the trade to fluctuate. In a 200:1 leverage for example, if you leverage for a 100,000$ Lot trade, that means you need to put up $500 of your own money out of your account. That money does not 'disappear'--it is "set aside" for that trade while it is open. That $500 stays FIXED..what changes is the VALUE of the Lot you trade. If the lot increases in value--or decreases in value, depending on how you traded for it to be LONG or SHORT wil depend if you make money or if you owe more money out of your account to make up the balance to $500 when you close.

For example: If you have an account with $3000.00 and trade a trade $100,000 Lot of currency at 200:1 Leverage, you will need to have $500 for that trade to execute (slightly more really--to include the spread difference--but you get the idea.). When you say go LONG that $500 is put aside out of your account. If the price falls on a LONG trade--money comes out of your account to mainatin that $500 needed. If your trade goes well and it increases--money is added to your account to maintain that $500. When you sell--that difference made from the value is your profit or loss. When you close out the trade--the money left and any profit, or loss, is put back into your account to trade with again immediately. no "day trade rules" and no "waiting"..when a trade is closed--its done and funds are usually immediately available to do as you please.

Let me know if that info is helpful or not...
-w

[wolf825]

I don't directly understand Question #3--what numbers in vol you are referring to...? can you elaborate more?


Question #4: How your broker makes money--your broker makes thier commission that is built into the spread of the currency pair you are trading, unless your broker has a different . If you have EUR/USD and its a 3 pip spread--your broker is making those 3 pips in commission when you close out the trade (the price you may is not neccesarily the price THEY pay for trade--and they make the trade and front you the capitol). Say you buy a mini lot of $10k EUR/USD, and the quote is 1.3500/1.3503, you bought at 1.3500--if you close the trade immediately, you will have to give your broker money from your account to cover the 3 pip difference--the leverage down amount from the Lot size. On a mini lot its about $3. If you wait and sell at 1.3507/10--you made 7 pips and your broker already made their 3 pips worth--but you will notice that nothing more comes out of your account and that is because your broker took their spread money when you executed the trade as it was already in profit after the price broke over the trade bid price. If you sell at a loss on the Lot at 1.3490/93, you lose 10 pips--the broker made their 3 pips commission and the difference to make up the sale came out of your account. the only thinkg you really need to keep track of is the spread, and when you close your trade that you have enough money for any loss you need to make up. There are safeguards in place in Forex with many brokers because of the wild swings Forex is subject to do--if your account with an open trade drops to the required minimum amount you need to maintain it or keep an active trade open--your trade is automatically closed out. You cannot lose any more money than you put into your account...

hope this helps....
-w

[BigBubba]

Thanks for answering, Wolf.

I didn't go to babypips. I only bookmarked the site. I read more of investopedia until an example they gave directly countered an example they gave. Or so it seemed. Then I opened a demo thingie and started to buy and sell for loss, of course. Just to play and get the hang of things.

I guess I'm more confused. But let me point out some items and hopefully we can resolve them.

Originally Posted by wolf825

Question #2: First of all, A Lot--that is a fixed amount of the currency you are buying or selling--if its $100,000.00 Lot bought of GBP--that is $100,000 in GBP at the time of the purchase--the value at the time. If you are buying Yen, that is $100,000 dollars value in Yen...if its Francs--then its 100,000 value of Francs..if its USD--its 100,000 of USD...and so on. You will often see it displayed as the Yen or Franc or GBP exchange rate on the currency...

So when I buy 1 Lot of a pair let's say GBP/JPY, I'm buying 100,000 of English Pound? Or $100,000 USD worth of English Pound at the current exchange rate of those two? And what is the point of the JPY in this then?

I understand the very basic concept behind exchanging money. Buy when your dollar can buy more and sell when your dollar can buy less. So the less amount of other currency will be needed to make one dollar and so you'll have more dollars. Or what currency is the base.

Other than that I guess I understand the in EUR/USD=0.0xx the euro would need to get stronger for the overall pair to be stronger for a trader to make profit. Is that correct?

[BigBubba]

Originally Posted by wolf825

For example: If you have an account with $3000.00 and trade a trade $100,000 Lot of currency at 200:1 Leverage, you will need to have $500 for that trade to execute (slightly more really--to include the spread difference--but you get the idea.). When you say go LONG that $500 is put aside out of your account. If the price falls on a LONG trade--money comes out of your account to mainatin that $500 needed. If your trade goes well and it increases--money is added to your account to maintain that $500. When you sell--that difference made from the value is your profit or loss. When you close out the trade--the money left and any profit, or loss, is put back into your account to trade with again immediately. no "day trade rules" and no "waiting"..when a trade is closed--its done and funds are usually immediately available to do as you please.

So assuming EURGBP is 0.6752. If one buys 3 Lots using 100:1 leverage with $3000 in account, what is the amount actually being spent on this? Does 100:1 leverage say that I'm spending 10% of the cost? The broker spends the rest.

I guess I'm comparing to options where the premium is 1.45 and one contract will cost: 1.45 x 100 = $145.

I'm not able to easy figure that out here.

[BigBubba]

Originally Posted by wolf825

I don't directly understand Question #3--what numbers in vol you are referring to...? can you elaborate more?


Question #4: How your broker makes money--your broker makes thier commission that is built into the spread of the currency pair you are trading, unless your broker has a different . If you have EUR/USD and its a 3 pip spread--your broker is making those 3 pips in commission when you close out the trade (the price you may is not neccesarily the price THEY pay for trade--and they make the trade and front you the capitol). Say you buy a mini lot of $10k EUR/USD, and the quote is 1.3500/1.3503, you bought at 1.3500--if you close the trade immediately, you will have to give your broker money from your account to cover the 3 pip difference--the leverage down amount from the Lot size. On a mini lot its about $3. If you wait and sell at 1.3507/10--you made 7 pips and your broker already made their 3 pips worth--but you will notice that nothing more comes out of your account and that is because your broker took their spread money when you executed the trade as it was already in profit after the price broke over the trade bid price. If you sell at a loss on the Lot at 1.3490/93, you lose 10 pips--the broker made their 3 pips commission and the difference to make up the sale came out of your account. the only thinkg you really need to keep track of is the spread, and when you close your trade that you have enough money for any loss you need to make up. There are safeguards in place in Forex with many brokers because of the wild swings Forex is subject to do--if your account with an open trade drops to the required minimum amount you need to maintain it or keep an active trade open--your trade is automatically closed out. You cannot lose any more money than you put into your account...

hope this helps....
-w

Question #3: The order screen asks the volume I want to buy. Their help says the volume means Lots. So I guess that means how many Lots I would enter for the order.

I'll check out babypigs i mean pips. This is what I wanna understand. How to calculate the total cost of the buy, the sell, and the profit/loss. Currently, I'm buying and hoping the number will go up. Only noticing how interesting it is and the reaction.

[techno791]

Some brokers ask for how many lots, and some uses the actual money amount, ie $100k, one standard lot).

To figure out how much a lot is worth is good for calculating your leverage and usable and unused margin I assume. But what might be easier is Lots and pips.
A pip is how much each....pip is worth per standard lot. If you're trading a mini-lot($10,000) just move the decimal place over one.
Rule of thumb is each pip is worth 10 bucks, or 1 dollar per mini lot. Which means 5 standard lots are 50 dollars, or 5 mini's are 5 dollars.

CMSfx rates as of 15th of August


As far as "how much it costs you to buy", I explained this somewhere on here. But every broker is different. It depends on your leverage.

So for example, you get charged per lot.

So let's say:
- you have $500 dollars in your account
- it costs $250 for every standard lot(100k)
- each pip is worth exactly $10

In my case, and I think it's close to the standard if it's not exact, here's what happens.

I short one lot of NZD/USD. $250 from my account goes into another column. I now have $250 left in usable margin.
Which means, Divide a pip($10) to you're unused money. 10/250 is 25. You have 25 pips until you get a margin call.
When you get a margin call, you(or at least I do), get my original $250 back, and now my account has $250, and NOT $0 dollars. I don't have 50 pips of room, just 25.

It's as if the money per lot goes into escrow. I ASSUME if your trade was going up 500 pips, possibly you don't have to close out to use that money for another trade, you can just keep on going, but I haven't been so lucky yet.

It's complecated, and the easiest way to learn about lots and your broker, in my experience, has been to completely mess up and lose the money!

In my case I suggest you do mini's until you figure out all the ins and outs. With $25 per lot, I learned all this the hard way. If I have 100 dollars, and each mini is 25 bucks, I thought I could have four open, but it doesn't work that way.

Leverage is different. It could be 35 dollars, it could be 50 dollars, etc. Depends on your broker. I have 16 variable columns on the software for open positions .

[techno791]

What is a lot?
In the currency market, contract sizes are referred to as ‘lots’. A standard contract is equal to $100,000 USD. A trader placing a 4 lot trade is thus trading $400,000 dollars in the market. Because most traders are using margin, standard lots are typically controlled with $1,000 (100:1 leverage). The above contract sizes are listed in order to determine Pip values based on the contract size you are trading. As you likely know, many currency brokers now offer ‘mini’ or even ‘micro’ lots. Mini contracts are simply 10% the size of a standard lot, a micro contract would thus be 10% the size of a mini contract.

Can't really find much more on their site so far.

Leverage
http://www.ibfxu.com/Courses/FXM/fxm1012.aspx

Apparently they have a whole course, but it's numbers so I'm just clicking randomly.

[BigBubba]

Originally Posted by techno791

Some brokers ask for how many lots, and some uses the actual money amount, ie $100k, one standard lot).

To figure out how much a lot is worth is good for calculating your leverage and usable and unused margin I assume. But what might be easier is Lots and pips.
A pip is how much each....pip is worth per standard lot. If you're trading a mini-lot($10,000) just move the decimal place over one.
Rule of thumb is each pip is worth 10 bucks, or 1 dollar per mini lot. Which means 5 standard lots are 50 dollars, or 5 mini's are 5 dollars.

CMSfx rates as of 15th of August

As far as "how much it costs you to buy", I explained this somewhere on here. But every broker is different. It depends on your leverage.

So for example, you get charged per lot.

So let's say:
- you have $500 dollars in your account
- it costs $250 for every standard lot(100k)
- each pip is worth exactly $10

$250 for one Lot. That is some standard like saying $10 per pip in standards?

So in other words, for even lots (meaning 1,2,etc....) you need at least $250 when trading standard lots.

For minis, you need at least $25 for 1 lot?

Originally Posted by techno791

In my case, and I think it's close to the standard if it's not exact, here's what happens.

I short one lot of NZD/USD. $250 from my account goes into another column. I now have $250 left in usable margin.
Which means, Divide a pip($10) to you're unused money. 10/250 is 25. You have 25 pips until you get a margin call.
When you get a margin call, you(or at least I do), get my original $250 back, and now my account has $250, and NOT $0 dollars. I don't have 50 pips of room, just 25.

It's as if the money per lot goes into escrow. I ASSUME if your trade was going up 500 pips, possibly you don't have to close out to use that money for another trade, you can just keep on going, but I haven't been so lucky yet.

It's complecated, and the easiest way to learn about lots and your broker, in my experience, has been to completely mess up and lose the money!

In my case I suggest you do mini's until you figure out all the ins and outs. With $25 per lot, I learned all this the hard way. If I have 100 dollars, and each mini is 25 bucks, I thought I could have four open, but it doesn't work that way.

Leverage is different. It could be 35 dollars, it could be 50 dollars, etc. Depends on your broker. I have 16 variable columns on the software for open positions .

So restating it.

Instead of worrying about how much the cost is, people track lots and pips.

So in a standard account:
Each pip up is $10 per lot. Each pip down is also -$10 per lot?

In a mini:
Each pip up is $1 per lot. Each pip down is also -$1?

Both:
The pair will go up by the number of pips in that pair's spread and then it will become profitable just like stocks?

I think I get the paragraph you wrote about margin calls.

[BigBubba]

So

USDJPYm 116.40
sold 116.60

Profit: 120.07

Can someone explain it to me. IBFX has a spread of 3 pips on USDJPYm.

So I bought 7 lots.

It moved 20 pips - 3 (for the broker). So per lot 17 pips. 17*7 is 119.00. How do they arrive at 120.07. Not complaining but curious.