Forex trading is different from other markets, such as the stock market. In these markets, when shares are bought or sold, that is the only action taken. With the Forex market, however, things work differently. Each sale within Forex results in a simultaneous purchase and vice-versa; this is where the “exchange” in “foreign exchange” comes into play.
Currencies are all traded in pairs. There are two types of currency pairs: major pairs and cross-currency pairs. All major currency pairs involve the US dollar. Examples include the Euro-dollar pair and the dollar-yen pair. Cross-currency pairs are alternative ways of trading that do not necessarily involve the US dollar; cross-currency pairs are also known as cross pairs for short. Examples of cross pairs include the Euro-Swiss pair and the Euro-yen pair.
The way in which success is measured in Forex trading is by the profit and loss of the pair, also known as P&L. It is vital to understand how P&L works when dealing with online margin trading; the amount of margin available to work with is directly affected by your P&L.
Your opening margin balance is your initial margin deposit. This is the amount of collateral that you put up when creating your trading account to support the margin requirements of your broker. It is important to note that, unlike other markets, forex trading does not deal with margin calls. Rather, a ratio of margin balances to open positions must be maintained.
An example of how margin ratios work will explain this concept further. Suppose your broker requires that you maintain, at all times, a margin of 100%. Also suppose you have an account with a 100:1 leverage ratio. This means you can control $100 for every $1 of margin in your account. This means that to control $10,000, you will need $100 in your account. This is because $10,000 divided by your leverage ratio of 100 gives you $100.
If your margin balance ends up at less than the broker's required amount, due to losses you've incurred, the broker can terminate your account. This is why it is crucial that you keep an eye on your margin balance. Should this happen, any losses you've experienced will usually be locked in. There is a lot that can be said about margins and margin balances, but this is usually covered in the fine print for the account you create and can vary a lot from one broker to another, making it very important to read over everything ahead of time.
There is much to know about the Forex market and trading within it, but this article represents the most fundamental and important information needed to understand the deeper aspects. The Forex market really isn't as complicated as it seems, and once you understand these basics, you'll have a much easier time not only learning more, but you'll have a much easier time being successful in trading as well.
This article was provided by the leading financial trading education site - FinancialTrading.com.