Tag: balance

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Forex Economic Indicators

What Is Gross Domestic Product (GDP) & How Is It Useful For The Forex Traders?

Introduction

Introduction

Introduction

Gross Domestic Product, also known as GDP, is one of the main Microeconomic Indicator in Forex. It is the total amount of money spent on final goods and services. GDP is expressed in percentage terms and is calculated across different time periods. The time period is usually from one quarter to another.

It is a standard measure for the value added to the country’s economy through the production of goods and services during a specific time period. GDP is published by the International Monetary Fund (IMF), and information on the same can be found on their official website.

What does GDP measure?

Just as explained in the beginning, GDP measures the health of an economy. If the GDP of a country is high, it means it is receiving capital flows from central banks and institutions, which is a big positive for that country. However, if the GDP numbers are declining quarter on quarter, it means the economic growth of the country is shrinking. When GDP falls, unemployment in the country rises, and output in production drops.

GDP is important because it gives a birds-eye view of how the economy is doing. It is a sign of people getting more jobs, getting better pay, and businesses feeling confident about investing more.

Calculation of GDP

The GDP of a country can be calculated by using the below-mentioned formula

GDP = C + I + G + (X-M)

Where C is the spending made by consumers

I is the investment by businesses

G is the government spending

(X-M) is the net exports

How do Forex traders use GDP?

GDP is an indicator that is used by both technical and fundamental traders. It is one of the most critical drivers of the economy and is closely monitored by all. GDP is important because it can affect how the financial markets can behave, both positively and negatively. Strong GDP growth translates into higher corporate earnings, which directly appreciates the currency value. Conversely, falling GDP means the economy is weakening, which is negative for the currency and, therefore, stock prices. According to economists, a recession is said to occur when there are two consecutive quarters of negative GDP growth.

One should not forget that GDP is a lagging indicator, meaning it shows what the economy did in the past. It does not predict the state of the economy in the near future. Hence, if the GDP data of a country is not good, traders view this as an opportunity to buy the currency and make a profit in the long term.

Summary

Understanding the Gross Domestic Product and its growth rate is essential for investors and traders as it affects the decision-making process of policymakers of the country. When the GDP growth rate is high, the central banks raise interest rates and encourage investment. High-interest rate is said to attract foreign investors and financial institutions. With the improvement in research and quality of data, statisticians and governments are trying to find measures to strengthen GDP and make it a comprehensive indicator of national income.

Categories
Forex Course

32. Understanding Stop Out Level In Margin Trading

Introduction

Introduction

Introduction

In the last lesson, we saw how Margin Level was found to be useful for giving meaning to Margin Call Level. Similar to the previous lesson, in this lesson, we shall be discussing another term that involves the dependency of the Margin Level. This lesson will be dealing with the understanding of what Stop Out Level is and also the implications and consequences of it.

Stop Out Level, and Margin Call Level have almost got the same meaning. There is only a thin line difference between these two. Hence, understanding the Margin Call Level is critical to comprehend Stop Out Level.

What is Stop Out Level?

Stop Out Level is a level that is set by the brokers, which triggers them to take action when the Margin Level falls below this specified level (Stop Out Level). That is, when the Margin Level breaks below the Stop Out Level, the broker forcibly closes some of the trader’s position, usually without their consent. The positions are liquidated because of the unavailability of the margin in the account.

Before the broker closes the positions, the trader is first intimated that their Margin Level has significantly reduced and is at risk. This intimation is called Margin Call. If the Margin Level falls much more than the Margin Call Level and goes below the Stop Out Level, the positions are liquidated. And this process of liquidation is called Stop Out.

The complete flow to Stop Out

If we were to dig deeper, the dependency of Stop Out level drops down to the basic concepts like Balance, Margin, Floating P/L, etc.

For instance, when a trader takes a position, the above terms come into action. If the trade is in profit, the floating P/L increases, and there are no worries about the margin call and stop out as the margin level would be considerably higher than the margin call level and the stop out level. But, if the trade is running in the negative, eyes must be on the margin call level as well as stop out level. Let’s get this point clearer, with an example.

Let’s say a trader has deposited $1000 into his account and has used $200 for taking few positions. Consider the Stop Out Level to be at 20%.

If the trades are running in a loss of$970. The equity for this is calculated as:

Equity = balance + floating P/L = $1,000 + (-$970) = $30

Similarly, the margin level will be,

Margin level = (Equity/used margin) x 100% = ($30 / $200) x 100% = 15%

Now, since the margin level has gone below the stop out level, the positions are scratched off. So, the trader will have booked a loss of $970. And the newly updated balance will be $30.

This brings us to the end of this lesson on Stop Out Level. Also, this completes all the terminologies that are involved in Margin Trading. Take the quiz below and stay tuned to learn a different lesson tomorrow. Cheers!

[wp_quiz id=”51331″]
Categories
Forex Course

25. Margin Terminologies – Balance & Rollover

In the previous lesson, we have understood the fundamentals of margin/leverage trading. In this lesson and the following few lessons, we shall be discussing different terms related to margin and

In the previous lesson, we have understood the fundamentals of margin/leverage trading. In this lesson and the following few lessons, we shall be discussing different terms related to margin and

In the previous lesson, we have understood the fundamentals of margin/leverage trading. In this lesson and the following few lessons, we shall be discussing different terms related to margin and margin account. And in this lesson, we will primarily talk about balance and also a brief description of the concept of rollover in Forex.

What is Balance?

Balance is the most basic term used in any type of account. Be it a regular savings account, a Demat account, or a margin account. The meaning of balance remains the same in the margin account as well, just like other account types.

Balance in a margin trading account is the amount of capital deposited by the user to his/her trading account. For example, if a trader deposits $1,000 to their margin trading account, then their balance would be equal to $1,000. This is the amount used for taking positions in the market. Apart from that, it is used up for other stuff as well, which will be discussed in the next sections of this article.

Another vital point to note here is that the balance amount is not affected when a trader enters a trade or when a position is open. The balance gets updated only after the trade is closed (rollover fee is an exception).

When does the balance gets affected?

The balance in a margin account is affected in the following ways:

  • When cash is deposited to the margin account.
  • When an open position is squared off (closed).
  • When open positions are kept overnight, so, though positions are open, funds will be debited from or credited to the margin account. And this fee is referred to as the rollover fee. 

What is Rollover in trading?

The concept of rollover is not a term that comes under a margin account. However, since this term is closely related to balance, it shall be discussed in this lesson.

As the name pretty much suggests, rollover is the process of shifting an open position from one trading day to another. This is a process that is done automatically by the brokers. As far as the internal working of rollover is concerned, the brokers close a position at the end of the trading day and simultaneously open a new position (at the closing price) the next trading day.

For this rollover to be done, brokers charge a fee called ‘swap.’ This is where the balance comes into the picture, as swap brings a change to the balance. Note that swap happens in both ways, i.e., it can be debited from as well as deposited to the user’s account balance. The interest rates of the currencies are the ones that determine if the swap is to be credited or debited. In simple words, If you are paid swap, the money will be credited to your account balance. Conversely, if you are charged swap, the money will be debited from your account balance.

This concludes the lesson on balance in a margin account. In the upcoming lesson, we shall be discussing two more terminologies related to Margin Trading. Don’t forget to take up the below quiz!

[wp_quiz id=”49483″]