Forex Trading Specifics and Facts Information

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If you want to trade forex you simply have to know what margin requirement is, how margin call occurs and what does it affect. You also need to know why your forex broker will charge you interest or premium. While you chat with traders they will often use slang to express their thoughts in a shorter form: "what is going on with kiwi this morning?". Please see below explanation to read more about the trading specifics and the language used in the forex world.

Trading Terminology

Traders often chat with one another about a variety of topics related to the forex market, giving their perspectives and discussing trading ideas and current moves on the market. While communicating with each other they often use slang to express their thoughts in a shorter form. You can read about the slang and other trading terminology in these pages.

EUR/USD: Euro / US Dollar is often called Euro;

USD/JPY: US Dollar / Japanese Yen is often called Dollar Yen;

GBP/USD: British Pound / US Dollar is often called Cable;

USD/CHF: US Dollar / Swiss Franc is often called Dollar Swiss, or Swissy;

USD/CAD: US Dollar / Canadian Dollar is often called Dollar Canada, or C-Dollar;

AUD/USD: Australian Dollar / US Dollar is often called Aussie Dollar;

EUR/GBP: Euro / British Pound is often called Euro Sterling;

EUR/JPY: Euro / Japanese Yen is often called Euro Yen;

EUR/CHF: Euro / Swiss Franc is often called Euro Swiss;

GBP/CHF: British Pound / Swiss Franc is often called Sterling Swiss;

GBP/JPY: British Pound / Japanese Yen is often called Sterling Yen;

CHF/JPY: Swiss Franc / Japanese Yen is often called Swiss Yen;

NZD/USD: New Zealand Dollar / US Dollar is often called New Zealand Dollar or Kiwi;

Margin Requirements

As you know, the margin deposit is not a down payment on a purchase. Rather, the margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows you to hold a position much larger than your actual account value. Forex online trading platforms have margin management capabilities that allow you to get as much as four times the leverage of a typical futures contract. The trading platforms often perform automatic pre-trade checks for margin availability, and will execute the trade only if you have sufficient margin funds in your account. These systems also calculate the funds needed for current positions and display this information to you in real time.

For example, a broker might require only $1,000 in the trader's account in order to trade a 100,000 EUR/USD currency position. The $1,000 is referred to as "margin". This amount is essentially collateral to cover any losses that you might incur. Since nothing is actually being purchased or sold for delivery, the only requirement, and indeed the only real purpose for having funds in your account, is for sufficient margin.

Margin should reflect some rational assessment of potential risk in a position. For example, if a currency is very volatile, a higher margin requirement would normally be justified.

In the event that funds in your account fall below margin requirements, most forex platforms will automatically close one or more open positions. This prevents your account from ever falling below the available equity even in a highly volatile, fast moving market.

Overnight Interest

Every currency and commodity has a "cost of carry" associated with holding the position for more than one day. It is called "overnight interest" or "premium". In currencies, this cost is a function of the "interest rate differential" of the two currencies that comprise the exchange rate.

For example, in USD/JPY, the interest rate differential is the difference between short-term U.S. interest rates and short-term Japanese interest rates. If, for example, U.S. interest rates are 5.0% and Japanese interest rates are 1.0%, the interest rate differential is 4.0% (5.0% - 1.0%). This means that if a trader was to sell USD/JPY, he would have to pay 4.0% of the notional amount of the contract per year to hold the position. If position quantity is 100,000, the trader would have to pay approximately $4,000 to hold the position for one year. This translates to approximately $11.00 per day for holding the USD/JPY position ($4,000 / 365).