What is the difference between a Short and a Long when trading Forex?
To Buy is to go Long – To Sell is to go Short
We are dealing with contracts – not hard instruments. Contracts over the value of… which is actually a CFD (Contract For Difference)
There are 2 actions with these contracts – Buy & Sell and it doesn’t matter which order these actions take – Buy then Sell or Sell then Buy – this can be done because we are dealing with a contractual obligation.
What is a CFD?
A CFD Is s contract over the value of an asset, where you only need to put up a portion of the value of the contract as Margin (deposit) to open a position.
The amount of Margin required depends on the leverage that has been applied to the trader’s account and varies from 10:1 through to 500:1
As an example, 1 lot GBPUSD represents USD$100,000. 100:1 margin requires USD$1,000 margin to be set aside to open the position – 500:1 margin requires USD$200 to be set aside to open the position.
The level of margin can also be instrument specific. 10:1 usually apples to Equity CFD´s, whereas 100:1 – 500:1 usually applies to Forex.
For retail traders, CFD´s apply to Equities / Stocks / Shares, Futures Contracts, Forex Contracts.
What is margin and how does it work?
Margin is the amount of deposit which must be allocated to a position in order to open the position. The Margin is linked to the amount of leverage on the trading account. With Forex, this is typically ranging from 100:1, to 500:1. There are some providers that allow 1000:1, and some regions such as the EU & USA that have limited Margins to 30:1 – 50:1.
The truth about Margin is that it merely governs the amount of deposit required to open each position, it does not increase the amount of profit or loss made on the position.
What are swaps?
Swaps are the Interest rate swaps for the 2 currency pairs. What this is the difference in interest rates, as an example swap on AUDUSD is the difference of the interest rates in the USA and Australia. Depending on whether you are short or long, you may be paying that difference, and it is applicable to the position size of your trade.
If your trade is 2 lots, then you will be paying the difference between the 2 interest rates on the value of USD $200,000. If your position is 0.02 lots the swap rate applies to USD$2,000.
Swap rates are only applicable if the position is held overnight.
What is the difference between an Islamic account and non-Islamic account?
Under Quranic Law – Usury / charging interest on money is forbidden, therefore an Islamic account does not have swap rates applied to it.
However – there is no such thing as a free lunch – therefore wider spreads and commissions can be and are applied to compensate for the Swap charges.
What is the quote currency?
Every forex pair has a base currency and a quote currency – the Base currency s the 1st in the pair and the Quote currency is the 2nd in the pair.
EURUSD – Euro is the Base currency and we are measuring it via the relationship to it of the USD – the Quote currency
EURUSD – 1.0827 – 1 Euro is worth USD $1.0827 or roughly $1.08 plus ¼ of a cent.
What is a pip?
A pip is a unit of measurement of movement in the price action of a forex pair or Futures contact. With the exception of JPY pairs, 1 pip is the 4th decimal place for the value – EURUSD is 1.0827 – the pip is the last digit and 1 pip has a value of 10 of the quote currency – in this case USD
A move from 1.0827 to 1.0826 is a move of 1 pip. Because the Forex contract is measured as a total value of USD100,000, a 1 pip move is worth USD$10.
For JPY pairs a pip is the 2nd decimal place so EURJPY at 118.73 it is the 3 that is the pip value.
A move from 118.73 to 118.74 is a 1 pip move and is valued at 10Yen.
What is a Stop Order?
A long time ago, the only means of transmitting Instrument prices was via telegraphic means and abbreviations were used ALL the time except for punctuation. The word ¨Stop¨ was used to end a sentence. Therefore, if you wanted to place an order to buy a certain instrument if it reached a certain level and you were confident the direction was going to continue you sent a message similar to the following:
Buy 3000 AAPL 1246.34 on Stop
This message was to buy 3000 shares of Apple Inc if the price gets up to $1246.34 and above, continue to buy intil the order is complete End of message.
Over time it appears these continuation orders came to be known as ¨on Stop¨ orders and then shortened to ¨Stop¨ orders.
Stop order is the terminology for orders placed where you believe the price will continue direction.
What is a Limit Order?
A limit order is an order placed if you believe the price will reverse at a particular level or zone.
If you believe for example the EURUSD will reverse after its downward run at the significant support level of 1.0827, while the price is heading down you could place a limit order to buy at 1.0827, anticipating that pice will reverse in this area