forex rates: October 2009

Tuesday, October 13, 2009

Attractive spread in the forex margin trading

In the forex margin trading, it makes you possible to trade with the narrower spread just like the interbank market. This is much attractive. The forex margin trading does not require any credit line because the margin is placed in advance as collateral. This is how most investors could escape any default against the huge losses. Such narrow spread like 5 or 10 points would make you possible to trade as easily as lower rating banks. The key point of the forex margin trading is to trade forex in the equal condition with the interbank players.

Spread in the interbank market

At the interbank market, some market makers are called as price quoters who are obliged to make price quotations both for the bid rate and the offered rate at the same time, and other are called as position takers who take or hit the market prices which the market makers provide for. According to the request by a position taker, the market maker has to show his own price with considering the current market level and his own position. There does not exist the sole price because the forex market is different from the exchange traded products. He price is always moving, and therefore, the market makers would become necessary to quote the market prices with some spread widening as taking risks into consideration.

In the interbank convention, each bank sets a credit line to take the relevant counterparty risk. Each bank sets up the maximum limit of the outstanding, and then, there occurs "Never trade with such a bank". Most banks set the credit line in accordance with the rating or grades. It makes difficult for the lower rating banks to get the credit line from the higher rating banks. Even if the lower rating banks could get the credit line from the higher, the spread they actually trade would become wider. It is not simple how to decide the credit line for each bank because it is closely relating to the annual revenue target. In the forex market, the spread is getting two points or three between good names, while 5 to 10 points between the lower rating banks. It is needless to say that the spread should become wider when the price moving gets more rapidly.

Let's compare to TTS/TTS rates banks offering

When you want to make a deposit in foreign currencies at the bank, the TTS rate is applied for the exchange rate to buy the relevant foreign currency, while you can get Japanese Yen using the TTB rate when withdrawal. TTS/TTB rates are always shown at the counter in the bank. If the fixing rate for the day is 120.00 for a dollar, the TTS rate becomes 121.00 which is one big figure or one Yen higher than the fixing rate, and the TTB rate does 119.00 which is one big figure or one Yen lower. This spread between the TTS rate and the TTB rate gets 200 points or two Yen width in the end. Therefore, you should be happier to trade at the narrower spread, like 5 points or 10 in the forex margin trading.

Spread on the forex margin trading

In the forex market, the spread is defined as the price gap between the bid rate and the offered rate. Here, the bid rate stands for the lower price of the quotation at which you can sell at any time, and the offered rate is the higher price at which you can buy at any time. For instance, when the price quotation is shown as 120.30-35, the spread is 5 points, and 120.30 is the bid rate while 120.35 is the offered rate.

Swap point is neutral

Many investors seem to focus on the higher yield foreign currencies to get some swap points. Turn your eyes to the essence what the interest rate exists for. In general, the bluechip companies can borrow money from the bank in lower interest rate, while the others are required higher interest rate to raise fund. Forex market is the same here. The value of lower yield foreign currencies should be going up in natural under the circumstance that any other conditions remain the same. As long as the power is carrying on, someone can swim up against the stream, but will be flashed away when they are exhausted. The gap of interest rates between foreign currencies is correspondent to the speed of the stream. It is often heard that many individual investors could lose much money in the higher yield foreign currency deposit, but please make sure of this fact trying the forex margin trading. On the contrary, the purchasing position of lower yield foreign currency devalues the carrying cost due to rolling over and it feels that some losses would arise. It is only adjusted in advance by the disadvantageous interest rate earning. There is no juicy story on the earth. In the forex margin trading it should make both sides of position equal. Take it into your consideration that you should aim the capital gain by price movement instead of the income gain like the higher yield foreign currencies.

Swap poin

Swap trade adjusts the trading price arising from the differential in interest rates. Looking at the trade of long position in USD-JPY as we have mentioned above, and the cost of the position is decreasing day by day. It means a little advantageous for players whi have USD-JPY long position because the price they got originally becomes lower. This is caused by the swap trade for rolling over at the end of the day, and as a result, the trading price is adjusted, which is arising from the interest rate earning between US dollar and Japanese Yen.

To say exactly, the old position is set off by one side of the swap trade and the new one is set up by another side of the swap trade with taking the carrying cost into account. The swap trade itself yields nothing. Roughly saying, the higher yield currency is decreasing its values with passage of time. Even if you get some swap points in favor, the value would be going down in the forex market. Adversely, the interest rate might be going down when the value of higher yield foreign currencies is going up.

Swap

The rolling over day by day should be proceeded using swap, which is the combination of buying contract and selling at the same time on the different value dates. The swap is essentially traded for the foreign currency funding. Let us assunme 1 million US dollar versus Japanese Yen which to be bought and sold.

(1) Buying USD and selling JPY on the spot date, which is two business days succeeding to the trade date.

(2) Selling USD and buying JPY on one month correspondent to the spot date

You have to pay JPY and receive USD at the spot date that is two business days after the trade date. Thus, first, your aim to raise fund in USD results in achievement. After one month passes, the value date of (2) comes, you would have to pay the relevant USD and receive JPY. In this way, it follows that you should raise the fund in USD using the collateral in JPY during that period. Stop here a bit. In case that the interest rate of JPY is assumed to be 1% and that of USD to be 6%, it should be a bad trade for the USD lender for that one month, isn't it? Therefore, the swap trade has the market convention that the trading price should be adjusted in advance not to be disadvantage for the side who is placing higher yield foreign currency. This price gap is just called as the swap point arising from the differential of interest rates yielding between two currencies. In case that the commodity currency yields higher interest than the base currency, it follows to be called as discount system. One the other hand, in case that the commodity yields lower, it should be as premium system. It is needless to say that there does not exist any exchange risk because the trade of buying and selling would be made at the same time.

It does not make sense that the swap is traded itself. The banks use the swap trade for covering the foreign currency deficit during the necessary period. In the forex margin trading, the swap trade is made use of for the position rolling over day by day. If you buy US dollar in the forex market, you would need to pay JPY two business day succeeding to the trade date, but you can postpone the payment schedule using the swap trade. When your position becomes sure to leave open at the end of the day, you have to take action to avoid JPY payment on the following day. You have to make a swap trade that forces you buying JPY and selling USD on the original payment date and selling JPY and buying USD freshly with some swap points on the following day of the original payment date. Most forex brokers usually make this swap trade automatically without customers' permission. In addition, this swap trade cost no commission fee. In this way, individual investors can carry their position for ever. As the swap trade is defined as a purchasing agreement and not a loan agreement, the forex margin trading allows investors to raise fund at on-balance without any loan agreement.

Rolling over

In the interbank market, the spot forex makes it a rule to make a process to settle two business days after the trade date, but the forex margin trading has no need to pay or receive the full amount of the contract values. The forex margin trading system allows to set off the profit or loss within the margin account. If the position is closed clearly in a day, the relevant profit or loss is forced to net to the account balance. Needless to say, you can carry your position to the following day. This is called as "rolling over". This process of rolling over is left continued automatically every day until the position is liquidated. There is no time limit for carrying position in the forex margin trading.

Forex margin trading and Swap

The most hard to understand is the swap in the forex margin trading. It is characteristic in the forex margin trading that the carrying position is automatically rolled over using the forex swap. Let us explain what the swap is, which makes you able to carry your position day after day.

Attractive commission fees

The forex margin trading is much attractive in the commission fees as well. Speaking of USD-JPY, the foreign currency deposit has 200 points spread due to the gap between the TTS and the TTB rate although it does not call for any commission fee. The width to the cost of the forex margin trading should be 1/10 at worst or 1/20 at best as small as the foreign currency deposit. Thus, the lower commission fees system makes you possible to trade forex more actively in a day.

Narrower width to the cost and the higher chance

The price movement of 10 points brings about 10,000 JPY on the profit or loss if the trading position is 0.1 million USD-JPY. In the same way, the one point difference in the width to the cost should have got one thousand JPY, and it will affect to the investors psychologically whether the commission fees could be fully covered or not. When your position gets in favor, you will encounter the break even point where your are free from any trading cost. This is just the first significant phase you may face after taking position. You will feel easy when the market goes beyond this break even point.

The most important thing starts from here. If you feel the market movement is somehow strange, you must be annoyed where to exit or cut your position safely just after taking position. Sound judgment and immediate action are indispensable to withdrawal from the forex market. It is possible to get out easily without damage if the commission fees have already been covered up. As you can see, the narrower width to the cost would make you easier to get out of the forex market. As is often the case, some beginners are seen to fail into the depth to hell because they cannot take the relevant action to cut their position when needed.

The round trip commission fees

The commission fees cost on both side whether you would buy or sell. Make sure in advance if the commission fees appearing on the pamphlet is based on only one way or on the round trip. You should take the width to the cost into consideration to make money from the forex market.

Width to the cost

When we say the width to the cost in the forex market, it stands for the cost arising from the spread and the commission fees. It also indicates how many points market movement brings about situation under which the investor would be made to have no loss. In case of USD-JPY, it is usually expressed by points. If your width to the cost is 10 points, the purchase at 120.55 needs 10 points increase toward 120.65, where you are ready to take profit. The narrower width to the cost is, the more chance for advantageous situation for all investors. In case of the forex market, it is easily calculated the width to the cost should be equal to summation of the spread on the price quotation and a round trip commission fees.

Market risk is regardless of leverage

The market risk is dependent on the volume you trade, which is regardless of the leverage ratio. It depends on your choice whether you would have intention to trade the biggest position you are allowed to take. Higher leverage is often said to be more risky than the lower one, but you should understand the higher leverage allow you to some more rooms to decide the size of your position by yourself, which is quite advantageous for all investors because the amount of trading might become bigger using the same margin like the mortgage loan based on the collateral value.

The leverage is attractive

The forex margin trading has the great characteristics, so this is the high leverage. Assume that the mortgage loan when to borrow money from the bank. You can borrow some money within the collateral value of your land. If your collateral is worth about ten million Yen, it makes you possible to raise the fund up to 10 million JPY. If there is no need to raise, you have only to borrow money you need for the present, and it indicates there is more room to raise fund by borrowing money up to remaining 9 million JPY when you feel like.

The leverage mentions to the biggest possible amount of your position carrying in the forex margin trading. It shows how much times the margin allow you to trade. The margin requirement is indicated how much money you are required in advance to trade for each currency pairs, like USD-JPY, EUR-USD, GBP-USD. For example, 2,000 or 5,000 USD would be required for trade per 0.1 million USD. The smaller margin requirement follows the higher leverage ratio, needless to say.

What is the leverage effect?

The leverage effect means how much times you can trade in comparison to the actual notional value. This name is derived from the "Principal of lever" which small power (small amount of money) with a stick can move a heavy and big stone (big amount of money for trading). The US hedge funds have made huge profits using this leverage effect successfully in latter of 1990's. According to some sources, they are heard that they put about 100 times as much leverage effect as the principals of their funds. This effect sometimes gives bigger chance to take huge profits, but sometimes causes bigger losses in the same way. A lot of hedge funds fell in default around 1998 as you remember.

Maintenance margin

The maintenance margin is the most important for the forex margin trading. When the revaluation losses exceed and the account balance reduces below the maintenance margin, the automatic loss cut system is executed and your position is made clear. Under the margin call system, some more additional margin is called on at that time. Please keep in your mind that the maintenance margin is set up by each forex broker to allow investors to keep their position.

Margin requirement

The margin requirement is the key point in the forex margin trading. That stands for the deposit required in advance to take some positions. This amount determines the leverage ratio. Assuming that you should take 0.1 million USD position that is almost equivalent to 12 million JPY, the leverage itself differs from each other whether 0.1 million JPY is required or 0.2 million for the margin requirement. Needless to say that the fewer amount of margin requirement results in the higher leverage you can enjoy.

Margin

We usually pay some money just to buy something. In the same way, the forex market is defined to make a process to settle two days in arrear to the trade date. This is so called OTC spot trading. On the other hand, we don't have to pay full amount in the forex margin trading and we are required to pay or receive the translation gains or losses when the position are made square. Here, a problem may happen. If the losses by a certain investor expand further and he got fallen default to pay any more, what is happening? Such trading system would be forced to fail to keep working.

The margin requirement is defined as the deposit necessary for some collateral in order to solve such kind of problem. The forex margin trading turns out to be very efficient in the fund usage, and the forex margin trading requires one of tenth or one of twentieth as much money as the actual face value you would try to trade, although you might feel strange.

The name of margin which means "proof" in Japanese, should come from where investors must show money as proof to keep trading in former days. There are various types of the margin, the initial margin, the margin requirement and the maintenance margin. The beginner might feel unfamiliar to those terminologies.

Difference between forex margin trading and commodity futures

He forex margin trading is fully equipped with automatic loss cut system, which is quite different from the margin call system in the Commodity futures practice. Additional margin would be claimed when the losses by the Commodity futures expands to some extent. It is an awful system because you should always meet the margin requirement and fill the shortage in the margin account, which is usually required when the revaluation loss reaches 50% of the margin requirement.

In the forex margin trading, most brokers adopt the automatic loss cut system, where you would be forced to cut all your position to avoid further losses. This system functions as a safety net for individual investors, and the brokers using this system won't claim any additional margin even if the account balance falls deficit.

The forex margin trading does not have the delivery month to settle off while the Commodity futures have. The Commodity futures have some delivery months in line with the last trading date, like March, June, September and December. On the other hand, the forex margin trading has no maturity date, and so, the position in the forex margin trading is automatically rolled over until liquidation. It could be carried over without any limit until the liquidation, so long as the account balance allows. You have to roll over the futures contract if you carry it toward the next delivery month, while you don't have to mind in the forex margin trading.

Initial margin and the inception requirement

The initial margin is a deposit required in advance to trade forex, which is at least necessary to start forex margin trading. You might take a look at the phrase in some advertisements, "You need some Japanese Yen for opening your account". This just stands for the lowest level of the margin requirement at inception.

Commodity futures

Commodity futures are clearly defined as contracts in which the particular product should be settled on the specific date in the future, which is decided in advance like three months, 6 months or one year later. You can buy back or sell the futures contract as you like prior to such periods, by means of which you would not be necessary to settle the underlying assets or cash. This would make you easier to trade speculatively and actively to take profit from the forex market. Moreover, it is remarkable feature that you can trade bigger amount some times as much as you really own if your cash is placed for the margin account to the forex brokers. This is so called, the leverage effect, which makes you probable to take more profit than you expect, while you would lose more money.

Commodity futures market

According to the market convention in Japan, the Commodity futures is priced using both one-board trade and price-matching. Looking at the Tokyo Commodity Exchange, for example, the rubber futures are traded in the pit session by some men, while the crude lights or gold futures are traded in the electric session by computers. In case of one-board trade, it would be executed at the routine hours like the opening hour or the closing hour, where the prices on all demand are centralized toward the sole price.

Help desk for beginners

For the beginners who are not familiar to the forex market convention and the contract specification of the forex margin trading, and the PC usage, we make it a rule to recommend to use some forex brokers who have fully equipped with the help desk on phone. The forex margin trading is a high risk financial product as the leverage ratio is set higher. We never recommend to trade forex without your full comprehension of the risk and structure. You could expect a kind advice although the commission fees are set more expensive than the online trade due to some manpower necessity. Needless to say, you should have better rule out such a forex broker as introduces you to the forex margin trading without saying "it looks like a foreign currency deposit" or "the initial capital should be guaranteed" without any ground.

Comparison in the leverage

If you are asked like "Why do you want to trade forex using the forex margin trading?", the most answers must be "That is because I can enjoy the higher leverage effect on it." The high leverage ratio should not be a risk itself for all the investors. This reason is that the market risk in the forex market is dependent on the size of your position regardless of the leverage ratio. There exists another risk when the leverage ratio is too low because it should be difficult for most investors to cut loss easily. In addition, you have to place more deposit for the margin account to trade forex when you choose the lower leverage, and you will lose more money than you expect if you hesitate to cut loss. In adverse, the higher leverage would provide you for various choices in ways to trade forex, and then, you cannot say that the higher leverage should bring about more risks to you. If you feel uneasy against the forex margin trading with higher leverage, you had better invest other instruments but forex.

Comparison in the online system

The point to choose a forex broker with online trade depends on the system platform. Most forex brokers can provide for the demo style trading. First, you have to experience how to easy to use the platform on the demo version, and second, you would find how long to take for making the forex trades and how fair the price quotation is. Finally, you have to compare various platforms to pick up. Pay attention to the price quotation again when to trade in the real time market. In actual, some forex brokers would intentionally slide their price quotation in the direction disadvantageous for the customers, when they could judge the direction of customers' interest. It should be better to withdraw your money from such forex brokers as lead customers to the unhappy road, if you feel uneasy after several trials.

More attention to be needed that there are some other forex brokers who don't prepare the demo style platform. Even if the copy to catch is wonderful, you should not follow such forex brokers as have only the poor equipment. It is most significant to all the investors where the forex brokers can offer the fair price quotation on the real time basis. In addition, this is another key point to capture your own profit or loss on real time basis. It is most important for the platform system whether to be easy to use or not. Let's make sure of it using the demo style trading.

Comparison in the spread

We have already explained the importance of the width to the cost. It would be probable to affect your trading style in other aspects. Let us compare the spread in two cases, 5 points and 10 points, for example. Assuming that the trading range is set within 50 points with the lowest at 30 and the highest at 80. On of forex brokers would show "30-35", while others "30-40", when the market price is now just breaking downside. On the contrary one would show "75-80" while others "70-80" when the forex market is now breaking upward around 80. As you can see from this example, if you choose a forex broker with wider spread on the price quotation, it will lead you to lose the chance to buy at the cheapest zone and to sell at the highest. Please remember that such forex brokers as provide for the wider spread tend to force you hard to take profit, because of your play holding in narrower trading range than the actual forex market.

Troubles increasing

The forex margin trading is a very speculative financial product. The leverage would affect equally to both profit and loss. It is suitable only for the investors who expect higher returns against higher risks. Investors should not make use of the money necessary for the daily life.

It is a fact that a number of forex brokers are increasing who explains in the wrong way, "it is just similar to the foreign currency deposit", "it is sure to take profit" or "the swap points between two foreign currencies should yield several times as much as lower coupon". Never be cheated by such sales talks. Doubt such forex brokers as would cheat you.

Here, we are going to show you how to distinguish bad forex brokers.

Brokers to cheat the customers with sales talk, "You must get much money" as offering definitive judgment.
Brokers not to explain enough for the customers to comprehend the risks and characteristics.
Brokers with so much aggressive attitude.

Example of easy misunderstandings

To avoid useless misunderstandings, let us pick up some words to be taken care of from the "Code of Conduct" for the interbank traders. This booklet explains in Japanese. If you have any interest, take a look at this one.

Anyway, take care of sneezing in front of the mike, please!

From my experience

By the influence of sound quality or other noises, the conversation sometimes becomes hard to hear over the phone. It may bring about unexpected misunderstanding. It often occurs from my own experience when I was a bank staff.

It was the time when I entered the dealing room and tried to say "Good morning" to the forex broker via mike one morning. It was so cold that it might tickle my noise. I sneezed toward the mike. Next moment, a big voice was surrounding, "Given" from the speaker. The colleague traders were just laughing. I asked the forex brokers what has happened because I did not know at all. They said "three million US dollar has been sold". I decided hold that position. Because I felt sad and funny, I asked another friend. He said that he also sold US dollar as well in the morning because of his sneezing. Then, we both could not help bursting out for a while. This was a interesting story that we started from the short position on that day, and it indicates a terrible story that sneezing sound hears like "Hit your three" regardless of our intention.

Cautions on phone trade

There are some cautions in the phone trade, that is, it is necessary to avoid expressing yourself vaguely. You have to make it clear to the forex brokers, what kind of product you want to trade, how much the amount to be, the side to buy or sell, the time limit of your working order and other conditions. Moreover, please take care of misunderstanding by using the wrong words over the phone.

Good point of phone trade

The good point of the phone trade is to get some useful information over the conversation. The forex brokers make so much chats in the forex market with many customers where the market information is gathering. They also have special news sources. It is very convenient for investors who have no source to make sure what has happened in the forex market when the market prices move suddenly and rapidly.

The system failure or the connection trouble does not occur in the phone trade. The merit of the phone trade is that it should be stable to trade forex during 24 hours long.

Weak point of phone trade

The weak point of phone trade is just that you cannot trade forex timely and speedy. Several seconds would need for dialing up and another seconds for identifying what the customer to be, and more for specifying the product, the amount and the side you want to trade through the forex broker. In addition, some more seconds would take for getting the price quotation from the forex broker. It might take at least 30 seconds even at the good forex broker who is good at market connection. Usually, it should take above one minute to trade forex in the phone trade.

As the investors who have once experienced the phone trade should know, they could not buy or sell at the market where they have thought to be, and sometimes the price is apt to move in the disadvantageous direction for the investors. This case happens quite often when the investors want to close their positions. The forex brokers would look over their intention to trade, buy or sell, and slide the price quotation upper or lower because the forex brokers should have known the customers' interest in advance. That is because the forex brokers sometimes aim to gain from the gap between the actual market price and the customers' interest. It never happens in the online trade where to show the market price quite fair.

Good point in online trade

The online trade gives us a wonderful chance to trade forex. We can there trade forex promptly with watching the real time market. Nobody wants to miss the chance and the timing to trade forex in line with the actual market. The online trade could satisfy such demand more easily and cheaply.

In phone trade, it will take five seconds to dial up, 10 seconds to identify and 10 or 15 seconds to get the market price. It would take at least 30 seconds even at the brokers who are good at market connection. You would lose the chance to trade forex by 30 seconds, even though you have a good idea in the forex market.

The online trade provides the same market price for all individual investors at the same time, where is regardless of their intention to sell or buy. It follows that all the customers can stand on the fair place in the forex market. This environment is very favorable for the individual investors.

Comparison of system

There are many forex brokers who have various systems for online trade. One needs to install a stand alone software in advance to start trading and another differs in process to start. There are various types and shows respective performance. It is often the case that you cannot start online trade on your PC due to the memory shortage or the mismatching of OS version. It is best to choose the most suitable one to you from a customer-oriented and safety-conscious viewpoint, with taking a look at the demo trade play.

Weak point in online trade

How beneficial the internet tool has been to us! In addition to getting information easily, we take various benefits from the online trades as well. The online trade makes our trading style very simple and smart, but we are face to the risk to pay bigger sacrifice when the system trouble occurs in the network.

The interbank market is fully equipped with some electric broking systems through special devices or terminal for communication, while the forex margin trading for individual investors is executed on a PC basis through the internet. Therefore, the forex margin trading cannot be stable in the environment under which it is not always steady in compared with the interbank market. Failure in PC function, ISP, the provider and the server, various troubles may happen. It is impossible to avoid these factors completely.

All individual investors to use internet service are required to take these demerits into consideration, and to take the relevant actions when the system troubles happen.

Warning

It is probable for you to make more loss than your money in your margin account at the forex margin trading \. In addition, there remains another danger of losing your money at a glance at worst even though the automatic loss cut system works well. The forex margin trading is not suitable for the money for your life necessity.

Trading risk

The risk and return is always going together. The forex margin trading is much speculative, and then, risky. You can allow ten times as much position as trading in the forex margin trading. And so, it just means that you would have to take more than n ten times as much risks at the same time. There exists much higher risk in the forex margin trading with comparison to other financial products like the foreign currency deposit and forex MMF or so. Repeatedly, be advised that thrisk and the return is living together back to back.

Automatic stop loss and Margin call

He automatic loss cut system is utilized as the safety net where the position is forced to cut automatically when the revaluation losses are cumulated to a certain extent. It would be executed when the balance of margin account, which is the asset value with deducting the revaluation losses, becomes to fall short of the margin requirement given by each forex broker. This practice is broadly seen in the OTC market, especially in the forex market.

Unlike the forex market, the margin call system is adopted to the exchange traded markets, like commodity futures. The broker claims to investors for the additional payment for the compensation of the current revaluation losses in order to maintain the present position outstanding. For example, if the revaluation losses exceed 50% of the margin requirement, the investors have to fill the deficit within some days the broker would call on, otherwise, his position would be made clear at the market price compulsorily.

The forex market is moving during 24 hours without rest. In addition, there is no price band limit to be set in the forex market. The automatic loss cut system is called as the last resort for individual investors to protect from the unexpected market risks.

Difference between forex margin trading and stock trading

Some investors target the relative value of foreign currencies between two nations in the back of business trend and outlook in the forex margin trading, and others targets the prospect of the companies in the stock trading. The currency does not disappear as long as the relevant country goes alive, but the stocks may become just a paper scrap when the company goes bankrupt. Needless to say, forex trading is more stable to invest from a liquidity viewpoint.

What is stock trading?

The stocks are usually traded on the auction basis at the exchange. The biggest factor to decide the stock value is the earnings and the performance of the company. The expectation the profit by the company would be rising leads the stock prices to go up, while the expectation be declining leads it to go down. So most investors in the stock market are regarded to aim to find the enterprise whose stock prices seem to rise. If the corporate performance improves better than expected, the investors could get the additional dividend. Moreover, the investors can take more profit as capital gain by selling the stock when it rises higher than the price he obtained. It is, however, necessary to pay attention that the investors in the stock market would lose all the money when the company falls bankruptcy.

OTC and Exchange traded

The forex market is based on the OTC trade. Here, OTC does not have the same way in the rules to trade of the stock exchange where all market investors should be centralized. OTC market has the particular practice and two parties are allowed to decide the various conditions by themselves like price, contract date and the settlement date. One of them has to quote the price with the bid rate and the offered rate, and another has to decide to buy or sell on the quotation if he needs.

Stock exchange

The stock exchange is established in order to centralize whole market interests at one place for fair trading. There are five stock exchange in Japan and the listed companies' stocks are traded actively there every day. The companies who want to list in the exchange must apply for it and it would win the place to trade in the exchange after passing strict examinations.

Difference between forex margin trading and foreign currency deposit

The forex rates keep moving although 24 hours long, but the most forex authorized banks usually set the fixing rates only once a day. Foreign currency deposit is unsuitable to the short term trading although some banks seem to decide the fixing rates every hour. The forex margin trading just costs about 10 points or 20 points as per side for US dollar, which is quite contrary that the foreign currency deposit does above 200 points on the round trip basis. As a result, the forex margin trading makes you enable to trade forex about 80 percent cheaper than the foreign currency deposit if you have intention to get revaluation gains from it. This fact means that the forex margin trading is regarded as quite day trade oriented even if the market movement is less than expected.

The bank myth that the bigger bank never be collapsed does not go through nowadays, as many banks hold enormously huge amount of bad loans. Assuming the case of bankruptcy, you could lose several money in the forex margin trading, while you would lose all the money in the foreign currency deposit.

Foreign currency deposit away from insurance

The deposit insurance system is to protect the depositors under the condition where the deposit might not be paid back due to the financial institutes' bankruptcy. Deposit Insurance Corp, which is established by a government, the Bank of Japan and some other private sections, runs this system based on the Deposit Insurance Act. One thing should be taken into account that the foreign currency deposits are not applied for by this system. Please pay attention to the following misleading: "The deposit in the bank is all safe".

Let's compare to other investment

Foreign currency deposit is a kind of financial products, which forces you to convert your own domestic currency into foreign currency and make a deposit. You can enjoy the interest earning from the foreign currency. Some foreign currencies can offer you the higher yielding than the savings account. The conversion rate is usually fixed at 10 AAM once a day, and the TTS rate is applied for the new deposit and the TTB rate is for the withdrawal. Some banks make it a rule to decide the fixing rate every hour. TTS rate should be set one full point higher than the fixing rate which to apply for the new deposit, On the other hand, TTB should be set one full point lower than the fixing rate which to apply for the withdrawal. Therefore, it will cost at least two full points on the round trip through placement and withdrawal.

Charm point of forex margin trading

To tell the truth, there is no other investment entities than the forex margin trading from an efficiency viewpoint. The higher leverage and the cheaper commission fees should be very attractive to the individual investors. Some brokers are preparing for the automatic loss cut system for the sake of customers' safety to avoid unexpected loss expansion any more.

This web site is aiming that you should all understand some basic structures and the risks on the forex margin trading. Although some difficult specifications which to be unfamiliar to you, like leverage effect, swap spread and the width to the cost, commission fees or so, you can go ahead to read any section in which you got interested. Please inquire yourself to the forex brokers where you want to start about the margin account because the details of handling the margin account are somehow different from each other. Here, let me allow to explain a rough mechanism of the margin account.

Trading without margin

If you are trading without margin, you have only $1,000 of buying power. The the max you can go is buying (1000 x 109.2) Yens = 109,200 Yens.

Later when you sell off your Japanese Yen in higher price (USD/JPY 109.0), the returns you are getting back is $1001.8.

Profit made in the trade: $1.8
ROI of the trade: 1.8/1000 x 100% = 0.18%

Trading with margin

Now in case you are trading with margin of 100:1, the calculation of the trade will be giving you a total different picture:

Buying Japanese Yen when USD/JPY 109.2:

Long Japanese Yen = (100 x 1000 x 109.2) Yens = 10,920,000 Yens;
Short USD $100,000.Selling of Japanese Yen when USD/JPY 109.0:

Short Japanese Yen = 10,920,000; Long USD = (10,920,000 / 109) = $100,183.5.

Profit made in the trade: $183.5.
ROI of the trade: 183.5/1000 x 100% = 18.35%

Margin Trades and ROI in Forex

This example below shows how margin trading in Forex can magnify your investment ROI.
Taking $1,000 in a 100:1 margin account as example, you are now granted the purchase power of $100,000.
Say that you execute the trade between USD/JPY: Long Japanese Yen in USD/JPY 109.2 (meaning buying 109.2 Yens with 1 USD) and short JPY at the price of USD/JPY 109.0.

Leveraging your money in Forex margin trades

In Forex, the concept of leverage refers to the situation where a trader borrows the money of the Forex brokerage firm and uses that money specifically for trading in the Forex market. Because of leveraging, a trader with just a small capital outlay is able to invest in significantly larger value contracts.

It is common to find Forex brokerage firms offering up to a ratio of 1:100 for an account holder. In contrast, in the equity market, a trader needs to come with 50% of the transaction value for every trade that they make. Leveraging is all about profit maximization as well as risk minimization.

With leverage, the Forex trader is able to profit more with each trade that he makes. At the same time, the risk factor of his transaction is also multiplied many times over and hence the need for proper risk management. Margin trading refers to the leverage amount given to the traders to trade in the market.

One of the best features in Forex trading is that traders are able to trade foreign currencies with high margin.

You get 1:1 margin for stock exchanges, 2:1 margin for equity trading, 15:1 margin for futures market; but in Forex, normal trade margins are 100:1 and 150:1, or even 200:1 trade margins.

Typically the broker will require a minimum account size, also known as account margin or initial margin. Once you have deposited your money you will then be able to trade. The broker will also specify how much they require per position (lot) traded.

For example, for every $1,000 you have, you can trade 1 lot of $100,000. So if you have $5,000 they may allow you to trade up to $500,000 of Forex.

The minimum security (margin) for each lot will vary from broker to broker. In the example above, the broker required a one percent margin. This means that for every $100,000 traded, the broker wants $1,000 as a deposit on the position.

Trading Forex in huge margin with allows traders to control a large sum of money with little cash put on the tables. This in turns magnify the ROI dramatically.

Tuesday, October 13, 2009

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