A typical transaction that happens through interbank trading ranges from millions to billions of US dollars. Banks and clients, including multinational corporations, hedge funds, and private stakeholders, are known to be the participants of the interbank market. Due to this setup, the market’s transaction volumes are high for private investors.
As there is an emergence of dealing, Foreign Exchange trading was made available for traders. Brokerage companies came to be the intermediary that connects a trader to the market. As of the recent posting, investors can open a trade with a deposit that ranges from $100-$200. The principle is simple: brokerage companies require a specific amount from traders to open a transaction. This is necessary; it allows traders to enjoy leverage that helps them deal with higher volumes with relatively small capital. In case that the trade suffers from losses, clients lose only the invested sum. This is called margin trading. Margin is a kind of loan that the brokers give to traders in return for the deposit to open a position.
Such a transaction is executed in two phases: opening and closing a position. For example, a trader speculated that the value of the Euro would increase against Dollar; he or she needs to buy Euro to sell later on a higher price. Put, the act of buying the Euro is opening the position, and selling it means closing the area. This kind of setup is also called “long position,” but if one sells Euro after speculating that it will drop in price, it is called “short position.” If this implies one thing, it is that traders can profit from rising and falling markets.
As stated before, retail clients can access the Forex market through intermediate entities such as brokers. They act as a channel complete with real-time quotations and features that transmit trading orders of traders to the interbank market. Brokerages also save clients from physically going to dealing with offices to place trades. An internet connection and trading software on a computer, tablet, or any mobile device are the only requirements for one to have access to the Forex market.
There are rare moments in the Forex market when currency rates vary more than 3-4 percent during the day. This made deposit loss impossible. Once price fluctuation is unyielding, making losses exceed the client’s deposit, the broker has the power to close the position with its loss.
Margin trading is advantageous since it only requires 1-3% of the position volume. However, traders need not forget about the possibility of mounting losses. These losses are from irrational trading than can be negated through various trading strategies.