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## 190 – Introduction To Carry Trading The Forex Market

#### Introduction

When it comes to forex trading, we have so far covered how you can make money by taking advantage of price fluctuations. What, then, do you do when the price of a currency pair remains relatively stable for extended periods? Certainly not nothing! You carry trade.

In the financial market, carry trade means borrowing a financial asset with a low-interest rate, sell it, and purchase another one that pays a higher interest rate. That means the cost of borrowing (lower interest rate) is lower than the proceeds (higher interest rate). In this case, the profits you earn is the difference between the two interest rates, also known as interest rate differential.

For us to explain how the carry trade works, we first need to explain how the interest rate in the financial market works.

Say you go to a bank and take a loan at an interest rate of 2% per annum. If the loan amount is, say, \$2000, the interest charged per year would be:

`= 2/100 * 20000 = \$400`

Now, instead of putting the money under a mattress, you decide to buy a corporate bond, which in total, pays a yearly interest rate of 10%. This means that at the end of one year, you should expect interest income of:

`= 10/100 * 20000 = \$2000`

In this scenario, you have earned \$2000. Remember, the borrowing cost was \$400, which means you have a profit of \$1600. In other words, you have earned an 8% in terms of interest rate differential.

If that doesn’t sound like much money, let’s see how you feel when we apply leverage to the borrowing.

Say you have a stock portfolio worth \$20,000 and put this up collateral for a \$2,000,000 loan with an annual interest rate of 2%.

You take this money and invest in another financial asset that pays an annual interest rate of 10%. In this scenario, the interest rate differential is still 8%. How about your profit?

= 8/100 * 2,000,000 = \$160,000

With collateral of \$20,000, you have made a profit of \$160,000. That is an equivalent of 800% return.

In the forex market, if you let your position stay overnight, you will be charged a rollover fee. The rollover fee is the interest rate differential between the two currencies in the currency pair. Your account will be debited or credited accordingly, depending on whether the interest rate differential is positive or negative.

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## 33. Understanding Leverage & Its Relationship With Margin

### Leverage

There is a close relationship between the Leverage and Margin. That is, both go hand in hand. In simple terms, the margin is used to create leverage. The meaning of leverage is similar to the margin. It is a facility provided by brokers, which allows a trader to take larger positions by investing a lesser amount than required.

`Margin is expressed in percentage, while Leverage is expressed as a ratio`

Leverage is the ratio between the capital a trader has in their account to the amount of capital he/she can trade. And this ratio is expressed in the form “X:1,” where X is the amount of leverage.

### Expressing Margin in terms of Leverage

If a trader wishes to purchase one mini lot of a currency, they don’t need \$1,000 in their account balance. Instead, they will need only a small percentage of the position size. And this percentage is referred to as Margin Requirement.

This same percentage in terms of a ratio is termed as Leverage.

For example, let’s say John wants to buy 100,000 units of USD/CAD. If the Margin Requirement is 1%, John will require only \$1,000 to take this trade. That is, the Leverage for this trade would be 100:1.

### Calculating the Leverage

Leverage is calculated using the below formula

`Leverage = 1 / Margin Requirement`

Considering the above the example,

Leverage = 1 / 0.01

Leverage = 100

Hence, the leverage will be 100:1.

Similarly, if the Margin Requirement is 2%, the Leverage will be 50:1.

Conversely, using Leverage, we can obtain the Margin Requirement as well.

`Margin Requirement = 1 / Leverage `

For example, if the Leverage is 500:1, the Margin Requirement  = 1 / 500 = 0.002

Hence, the Margin Requirement when Leverage is 500:1 will be 0.002 or 0.2%.

Mostly, Margin and Leverage have an inverse relationship.

### Forex Margin and Stock Margin

Forex margin and Stock (Securities) margin are two completely different terms, though both are from the same trading industry.

In the Stock market, the margin is the amount a trader borrows from their broker to purchase a stock. Basically, it is like borrowing funds as a loan from their broker.

Whereas in the Forex market, the meaning of margin is different. Here, as we know, it is the amount of money a trader will have to keep aside with the broker as a deposit to open a margin position.

Hence, to sum it up, we can consider margin either as a loan provided by the brokers or as collateral collected by the respective brokerage firm.

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## 22. Perks Of Trading The Forex Market

### Introduction

The foreign exchange market is, no doubt, the most popular market in the world. Though it is considered to be a very risky business, it can prove to be the best platform for trading and investing if things are done wisely. People often are in a dilemma to choose between the stock market, commodity market, and the forex market. Hence, it is important to know the benefits each market has to offer. So, in this lesson, we shall discuss some significant benefits the forex market has to offer.

Open 24/5

The forex market is traded throughout the day from Monday to Friday. And this got to be the biggest advantage for the part-time traders. Since there are quite a large number of people who are into 9-5 jobs, the forex market is an excellent option as one can trade anytime during the day. Hence, the forex market is the most flexible market when it comes to timings.

Great Liquidity

The forex market is the largest market in the world. It has a huge volume of orders coming in every single second. With high liquidity, trades are executed as soon as the order is placed. In fact, the forex market has the highest liquidity compared to any other market.

In forex, the retail traders get the facility to trade with leverage. That is, with leverage trading, a trader can trade with quantities even if they do not possess the required amount. This is a great advantage as it paves the way for the small traders who are willing to participate in the market.

Nominal Commission and Transaction Costs

Another significant benefit to consider about the forex market is that the forex brokers don’t really charge any high fee, such as brokerage fees, exchange fees, or clearing fees. Having said that, they do charge commission, which is in the form of spreads. The bid/ask price, which is often referred to as the transaction cost, is typically around 1% when the market conditions are normal.

The Freedom on Lot Sizes

In forex, the brokers allow trading with as low as 0.001 lots. And traders can choose from 0.01 lots, 0.1 lots and 1 lot. Hence, there are variable lot sizes in this market. But, if you were to consider the futures market, the lot sizes are of one type and are determined by the exchanges.

Demo trading is one of the best features the forex brokers have to offer. And the cherry to the cake is that demo trading accounts are free of cost. Demo trading can be very helpful to both novice and professional traders. Novice traders can use it to get the hang of placing orders and other features in the platform, while professional traders can use them to test the consistency of their strategies. Hence, we can consider demo trading to be a powerful risk-reducing tool.

Facility to Go long and Go Short

In the forex market, there is no directional bias. This is because currencies are traded in pairs. If a trader thinks the base currency would rise in value, they can go long, and if they think it will depreciate in value, they can go short. So, unlike the stock market, a trader need not borrow shares to sell short an instrument. Hence, traders can profit from both rising markets as well as falling markets without any complications.

Hence, these were some of the most significant features and advantages of the forex market. In the coming lesson, let us put up a comparison between different markets and see which market proves to be the best; for now, take the below quiz and see if you have understood this lesson correctly.

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## How To Trade Crypto With A Small Balance – Cryptocurrency Margin Trading

### What is cryptocurrency margin trading?

Margin trading is a way of trading assets where traders use funds provided by a third party. Margin accounts allow traders to trade with much bigger capital, which can, in turn, bring bigger profit. Margin trading allows its users to leverage their positions. Users get to borrow a certain multiple of their original assets, which essentially amplifies their trading results. Amplifying trading results makes margin trading interesting in low-volatility markets such as Forex markets. However, they have their place in cryptocurrency trading as well.

In traditional markets, the additional funds are provided by an investment broker, while cryptocurrency markets work by traders offering the funds. In return for their investment, they earn interest. Some cryptocurrency exchanges also provide margin funds by themselves to their users, but that is far less common.

### How does margin trading work?

The first thing that has to happen in a margin trade is that the trader commits a percentage of the total order value. These funds are better known as the margin. Margin trading accounts are used to exploit the feature that is leveraged trading. Leverage is the ratio of borrowed funds compared to the margin. As an example, a \$1,000 trade with 100:1 leverage requires a margin of \$10.

Different trading platforms offer bigger or smaller leverage, based on their capabilities as well as the asset class they are trading. Stock markets usually trade with a 2:1 ratio, while Forex trading can have leveraged trading of up to 200:1. Cryptocurrency trading platforms offer trading of up to 100:1.
Margin trading offers its users the feature to open both long and short positions. A long position is a bet that the asset’s price will go up, while a short position is a bet that the asset’s price will fall. Trader’s assets act as collateral for the borrowed funds for the duration of the position. If the market moves against the position, brokers have the option to liquidate the position. Margin trading is riskier than regular trading due to the leverage it offers. Margin trading cryptocurrencies brings the risk even higher due to their inherent volatility.

### Pros and cons of margin trading

If we talk about advantages, the most obvious one is the profit-making potential. Leveraged positions can quickly result in larger profits as a bigger relative value is traded in the position. Margin trading is also useful when diversifying, as traders have the option to open many positions with relatively insignificant capital. The last advantage is simply the ease of use. Margin traders don’t have to shift large amounts of funds to the margin account.
If we talk about the advantages, we have to talk about the disadvantages of margin trading. Leveraged positions can, if not properly managed, bankrupt an account in a matter of seconds. Overleveraged trading that goes against the position will quickly lead to the liquidation of the funds. It’s extremely important to exercise caution while trading with leverage. Any form of stop-loss is also advised.

### Margin funding

Trading is a task that requires a lot of research, knowledge, and intuition. Many people do not have the skillset or the risk tolerance to engage in margin trading. However, they still want to make a profit off of the whole margin trading idea. The way for them to profit from leverage trading is margin funding. Some trading platforms and cryptocurrency exchanges offer an option for users to invest their money to fund the margin trades of other users. This process has a set interest rate, which is quite low. However, so is the risk associated with the investment.

### Conclusion

Margin trading is a useful tool for risk-averse traders that want to amplify their profit-making potential. If used properly, this method of trading can have an amazing effect on the profit size. On top of that, users interested in diversifying should also look into margin trading.
However, this method of trading amplifies potential losses as well. The risk it inherently brings is not for everyone.

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## Leverage Trading & Important Money Management Rules To Follow

### What is Leverage?

Leverage trading, AKA Margin trading involves borrowing extra funds to increase a trader’s bet while they trade. In this aggressive mode of trading, traders take more risk while expecting for additional rewards. This is done by the traders only when they think the odds are in their favor. Leverages is basically represented as a ratio or with an ‘X’ next to the times of leverage. For instance, to take a trade what is double the size of the amount you want to risk, you are essentially taking leverage of 2:1 or 2x.

The main leveraged products available today for Forex traders are spread betting and contract for difference (CFDs). Other products include options, futures, and some exchange-traded funds (ETFs). Before using leverage, a trader needs to understand the risk associated with it. Controlling risk means having money management principles that can be used on a daily basis. Since leverage trading can be risky, as losses can exceed your initial investment, there are appropriate money management tools that can be used to reduce your potential losses. Now let’s look at a few of these tools.

### Money management rules

Using stops

The right risk to reward ratio

The risk to reward ratio can be calculated by taking the total potential profit and then dividing it by the potential loss. You need to calculate risk based on your trading capital (risking not more than 2% of trading capital) and the leverage that you use to trade, as the leverage can alter your stop-loss.

Choosing the right leverage level

It is hard to determine the right margin level for a trader as it depends on trading strategy and the overall market volatility. But from a risk perspective, there is a maximum level of margin that one should use in order not to overexpose themselves to the market. It is seen that scalpers and breakout traders use high leverage when compared to positional traders, who often trade with low leverage. Irrespective of the type of trader you are, you should choose the level of leverage that makes you most comfortable. Since forex brokers provide a maximum leverage of 1:500, newcomers find it attractive and start trading with that amount of leverage, which is very dangerous.

If you are a novice trader, the optimal leverage to use in Forex should be below 10X. But if you are an experienced trader and are extremely sure about the trade you are about to take, the maximum you can go up to is 50X. But as discussed, Forex brokers offer a maximum leverage of 500X and some time more too. But it is advisable not to go that far until and unless you have the appetite to take that risk. By using less leverage, you can still trade even after having a series of losses in the market as you are taking a calculated risk.

### Bottom line

A simple rule to keep in mind is that you shouldn’t be risking more than you can afford in the market. You can open a special type of account with a forex broker known as limited-risk accounts, which ensures that all your positions have a guaranteed stop. They decide your account type and leverage based on the information you give them while opening an account. Hence, leverage can be used successfully and profitably with proper money management techniques.

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## 10. Understanding Lots & Different Types Involved

### Introduction

In the stock market, securities are traded in a number of shares. Similarly, in the Forex market, currencies are traded in units of the currency. And these units are combines into different tradable sizes, and they are called as ‘Lots.’ Hence, to buy and sell currency pairs, you must trade in the form of lots. There are different lot sizes depending on the number of units you trade. For example, 10,000 units are referred to as a mini lot and 100,000 units as a standard lot. Now, in this lesson, we shall understand other lot sizes along with some examples.

### What is a lot in Forex?

A lot in Forex is the number of units of a currency pair. Note that one unit is not equal to one lot. Instead, a collection of units of a currency pairs make a lot. And depending on the number of units that are involved in making up a lot, there are different lot sizes in the market.

### Different Types of Lots in Forex

Depending on the number of units, we can classify Lots in four types.

Standard Lot

The size of this lot is 1 and is made up of 1000,000 units of a currency pair. So, buying 100,000 units of EURUSD is as good as saying you have bought 1 lot of EURUSD.

Mini Lot

In terms of lot size, the quantity of ‘lots’ in a mini lot is 0.1. And one mini lot consists of 10,000 units of a currency pair.

Micro Lot

The quantity of lots in a micro lot is 0.01. And this lot is made up of 1,000 units. So, buying is 1 micro lot means, buying 0.01 lots or 1,000 units.

Nano Lot

0.001 lots make up one nano lot, and it consists of 100 units of a currency pair.

Now, let us take some examples and clear out the differences in these types.

### Examples

E.g., 1: Buying 5 standard lots.

Lot size distribution = 5 * 1 standard lot

Number of units = 5 * 100,000 = 500,000 units

E.g., 2: Selling 1.5 standard lots

Lot size distribution = 1 * 1 standard lot + 5 * mini lots

Number of units = 1.5 * 100,000 = 150,000

E.g., 3: Buying 3.2 mini lots

Lot size distribution = 3 mini lots + 2 micro lots

Number of units = 3.2 * 10,000 = 32,000

You must have seen brokers who let traders trade with as low as \$100. In fact, they let you trade mini lots with it. Now, you must be wondering how one can trade 10,000 units with just \$100 in their account. Well, this is facilitated by the brokers as they offer to trade with ‘leverage.’

In leverage trading, brokers let you take positions larger than the capital you possess. And as far as the mechanism of this is concerned, a broker lends you with the required money to take a position. And for this, they keep some amount of your capital as deposits. This deposit stays with them until your trade is open. When the trade is closed, the complete deposit is returned back to you. Leverage, also referred to as margin, is usually measured in ratios or in percentages. A detailed explanation of this shall be discussed in further lessons.

Hence, this completes the lesson on Forex lots and its types. And below is a quiz to help you check if you have grasped the concept better.

[wp_quiz id=”45130″]
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## Leverage & Margin – Why You Keep Blowing Your Account

Leverage & Margin – Key Principles Of Forex

There are two main ways that retail Forex traders are able to have enough financial capacity to access the Spot (instantly executed trades opened on the spot) retail Forex markets in the United Kingdom: one is to spread bet, which is classed as gambling and where you bet on a currency pair going up or down and where you pay no income tax on your winnings. The other way is to trade Contracts for Difference (CFD), and where your winnings are subject to capital gains tax and any losses can be offset against taxable income.

Retail Forex traders who trade via CFDs are able to gain market access due to a system of leverage (AKA margin ratio). Therefore, a trader with a fairly modest trade account of £1000 pounds is able to effectively borrow/control up to 30,000 units (AKA volume) of the base currency, or £30,000 pounds in order to trade the Pound against the US Dollar. This also depends on the pair’s exchange rate (GBP:USD where the Pound is the base currency. A base currency has more value than the counter currency on a unit by unit basis).

In this example, this would equate to approximately £3 per pip movement while trading in GBP:USD should the trader decide to take on the maximum allowed leverage ratio of 1:30 while utilising 3 mini lots per trade (100,000 units is equal to one standard lot, 10,000 is one mini lot and 1,000 is one micro lot).

But it wasn’t always like this: due to the the high number of novice retail traders (70% official statistics) losing all their deposited funds after just six months of trading, leveraged CFDs were restricted in 2018 by the European Securities Markets Authority (ESMA), in order to protect retail CFD Forex traders. ESMA imposed limits on regulated brokers who provide retail CFD Forex trading of 30:1 for major FX pairs and 20:1 for non-major pairs. Before this brokers were able to offer leverage of up to 1:500.
Therefore, leverage provides traders with the ability to trade large amounts of currencies for very little outlay. However, leverage is a double edged sword; because, by its nature it can greatly help to amplify winnings, but, it also increases the risk of substantial losses! One of the biggest reasons why retail traders losie their money is due to a lack of understanding and the misuse of leverage.

Margin

A Margin requirement is the amount of capital in an account that will be set aside in the form of a deposit, by the broker, in exchange for leverage, each time a trade is opened. Margin is calculated by the trader’s level of leverage and is effected by floating profit and loss and can therefore fluctuate up and down. Also, the more open trades the more margin will be set aside by the broker. Should traders open too many trades, or their account start to incur losses, they are more likely to receive a margin call from their broker as they approach their margin limit (a request to put more funds into their account to bring the margin into line) which would only happen in the event that the overall account position was running at a loss, assuming there were more than one trade open. If traders ignore margin calls they run the risk of their trades being closed out by the broker.

Margin call example

A trader wishes to buy EUR:USD with an account size of €1000 and buys 1 mini lot of 10,000 units with a leverage of 1:30, his/her margin is calculated as 10,000 divided by 30 = 333.
Therefore, the traders margin for that trade would be €333.00. If the trader loses money on the trade and comes close to the required margin of €333.00 in their account they would face a margin call / request to add further funds into the account. If the trader refused or neglected to do so, the broker would close the trade on their behalf.

Typically a traders platform will show a running profit and loss in the form of; account balance and fluctuating equity (this will differ if trades are open), the margin being taken up by open positions, free or available margin, and margin level shown as a percentage.
Leverage and margin requirement differ from one asset class to another. But, consistency and careful risk management is essential while considering how to factor these into your trading.

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## Contract For Difference (CFDs) Explained!

### What is CFD?

A contract for difference (CFD) is a form of derivative trading. CFD allows a trader to speculate on prices of global financial markets such as shares, indices, commodities, and of course, currencies. While trading CFDs, a trader gets to bet on both upside and downside movements of the market. The profit and loss for CFD are calculated by taking the difference between the entry and exit prices and multiplying it by the number of units. CFDs always comes with an expiration date, before which you need to close your position. Trading these CFDs may appear sophisticated and complex in the beginning, but once you start trading them, it becomes easy to handle.

CFDs are a leveraged product, which means a trader needs to maintain an optimum level of capital in their trading account to execute a trade. As it is leverage/margin trading, this capital can only be a small percentage of the full position’s value. While margin trading allows a trader to magnify their returns, losses will also be more as a trader will lose leverage times the capital he is betting on. Hence it is always recommended to go for less leverage. If you are a novice trader, we suggest you not to go beyond 2X leverage. And obviously, the gains and losses will be based on the value of a CFD contract.

### Costs involved while trading CFDs

There are three types of costs a trader may incur while trading CFDs. Each of them is explained below.

Holding cost – At the end of each trading day (mostly at 5 PM New York time), if the positions are open in your account, it will be subject to a charge called ‘holding cost.’ Holding costs will depend on the CFD, direction of the position, and the holding rate.

Spread – CFDs always come with a spread, which is the difference between the buy and sell price. This price is decided by the broker, and it varies from broker to broker. A trader will have to enter a buy trade at the buy price quoted by the broker, and exit using the broker quoted sell price. The narrower the spread, the less the price needs to move in trader’s favor for their profits to start. These spreads are extremely competitive across all the brokers.

Market data charges – For getting live market feed and accurate prices, a trader must pay the relevant market data subscription fees. However, this fee is mostly applicable to stock CDFs and varies from broker to broker.

### Things to remember

Like any other market, there are high risks involved in trading CFDs as well. CFDs are complex in nature (at least for novice traders), they carry a high risk, so it is important to do your research before you start trading. Also, since CFDs are leveraged products, losses can easily exceed your total investment. In volatile markets, your account balance can drop down to zero or even to a negative balance in no time. Following best trading practices like proper applying risk management to your trades will increase the chances of profiting.

We hope you find this article informative. Let us know if you have any questions in the comments below. Cheers!

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## Leverage & Margin – Key Principles Of Forex

Hello, and welcome to this latest edition of courses on demand brought to you by forex dot academy. In this course, we will be discussing leverage and margin. There is, of course, inherent risk when deciding to trade the financial markets. So, just before we begin, please do take a moment to familiarise yourself with the following disclaimer.