To put the above ideas in actual instance, let us say your observation and analysis brings you to think that the Euro will further go up against the U.S. dollar and you want to buy Euros in exchange for U.S. dollars, expecting the former to appreciate. You may elect to open a lot (100,000) and buy the Euros with it at a margin of 1%. If the exchange rate for EUR/USD is 1.25, you will in effect be buying 100,000 Euros at a price of 125,000 U.S. dollars. Since the margin is 1%, then the amount to be set aside in your account is 1% of 125,000, which is US$1,250. This means that your $US1,250 made you in control of 100,000 Euros. If your analysis is correct and the euro appreciated over the dollar, let us say, to 1.2550, then you will have earned 50 pips or $500. A pip is the tiniest price movement in a currency and more about this will be discussed in the next chapter. Should you decide to close the position, the deposit you previously made will go back to you and profits or losses you made will be credited to your account after calculations.
It is worthy to note that positions that are still open by the broker’s cut-off time equate to a rollover interest, which the trader will either pay or earn depending on his position. A borrowed currency would entail the trader to pay interest and a bought currency earns a trader interest. The cut-off time is usually at 5:00pm, Eastern Saving Time (EST). It would be better to close the account before the end of the trading day in order for the trader not to earn or pay interests. Your broker/dealer may be able to give you the specific details you need to know regarding rollover. Many brokers adjust their rates (rollover rates) depending on factors such as lending rates and account leverage. It would also be helpful for you to know that each currency is designated its own rate. U.S. dollar rate is .25%, Euros are 2%, Australian dollars are 4.25%, Japanese Yen are 0.10%, Swiss Francs are 0.5%, Canadian dollars are 1%, New Zealand dollars are 5% and the British Pounds are 1.5%.
If is highly advisable that traders do not go into trading with real money immediately. They may do some practicing by opening a demo account first before delving into the real world of forex. This demo account is free and allows the new trader to gain the full capabilities of a real account. Brokers offer these demo accounts for free to lure them to love the trade and eventually open a real account with them. It favors the brokers in terms of advertisement but it also favors the new trader since he manages to learn the ins and outs of forex trading without the actual risk. Any forex trading expert would advise a new trader to make use of these demo accounts before the real thing.
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