Basic concepts of FOREX
Making transactions with non-deliverable OTC financial instruments on the OTC Forex market can seem extremely difficult when you first meet it, and due to the large amount of information that is easily available on the Internet, how to interpret charts, market data, you can quickly overload and succumb to fear and gloom over such a complex and an unknown thing such as transactions with non-deliverable OTC financial instruments. Therefore, the best solution is simplicity and gradualness. Let's start step by step with simple terms and definitions that we will use in your introduction to the OTC Forex market.
The term “marginal leverage” is a basic concept with non-deliverable over-the-counter financial instruments, without knowing the mechanism of operation of which one should not even start investing. What is a marginal shoulder? In simple terms, this is a tool that allows you to carry out transactions using attracted capital, i.e. allowing margin forex trading.
What is margin trading?
The term Margin trading means trading at the expense of borrowed funds. Since the advent of loans (lending), its capabilities began to be used in trade. The OTC Forex market is no exception. True, here the procedure for obtaining access to borrowed funds is somewhat different from classical lending.
In fact, when a client wants to trade in an amount exceeding his own funds, he has the opportunity at the same time to take a loan within a certain amount. It turns out that as soon as a client decides on a deal involving borrowed money, he can immediately make it without participating in a banking bureaucracy and the languid expectation of a positive decision to issue a loan. It is very comfortable.
Which margin shoulder to choose?
Technobank OJSC does not issue a real loan for transactions with non-deliverable OTC financial instruments on the OTC Forex market, however, the concept of margin leverage on Forex does exist. The thing is that Technobank OJSC provides a “marginal leverage effect” based on the collateral principle. According to this principle, the amount that is actually required to complete a transaction will be calculated on the basis of this leverage. For example, in order to open a transaction for 100,000 US dollars, a client can have only 1,000 US dollars on his account. The collateral principle allows you to work on the OTC Forex market with a leverage of 1: 100 or more (1: 200, 1: 500). Such opportunities can turn the head of novice customers, but in order to invest safely in the OTC market, the leverage should be used as little as possible.
Margin Trading Principles
In order to understand how the marginal leverage in the OTC Forex market works, let’s take an example. The client has 10,000 US dollars in the account. He decided to purchase 1 lot (100,000 units of the base currency) in the EUR / USD pair, i.e. 100 000 EURO. Based on current quotes, 100,000 euros will cost him 117,000 US dollars. Thanks to the collateral principle, this operation is quite simple to perform, you only need to provide the collateral itself. Its size is calculated in accordance with the margin leverage (1: 100) i.e. 135,000/100 = 1,350 US dollars. Thus, for the purchase of 100 000 EURO you will need only 1350 US dollars. The remaining funds can serve as an airbag from a stop out. The concepts of stop-out and margin call will be discussed later.
Benefits of Margin Leverage:
Margin leverage can allow you to maximize the benefits of your investment funds by being able to transact with large non-deliverable OTC financial instruments using only a small initial margin collateral;
You can also open much larger positions than in the case of physical purchases of financial instruments;
Your financial result can be much larger;
You can reduce risks by making transactions with a large number of non-deliverable OTC financial instruments.
Margin shoulder risks:
Just as your profits can get bigger. Losses can also increase;
If the market goes against your positions, you may lose all the funds of your real account, so it is important to understand how to manage the level of risk in transactions with non-deliverable OTC financial instruments.
What are pips?
Pips (pips), also found the name point (point) - this is the smallest change in price that the market can make. When making transactions on the OTC Forex market, the client selects a currency pair in which one of the currencies is sold and the other is bought and earns on the difference in exchange rates. Accordingly, when the value of a currency changes, then the unit for which the change occurred is a pip (point).
Suppose we make transactions with foreign currency EUR / USD, the current rate is 1.2700. We predicted that there will be growth and opened a buy position. Our forecast came true, the rate has grown and amounted to 1.2705. Here is the price change, to the fourth digit after the decimal point (0.0001) it will be called a pip / point.
How to calculate the cost of pip?
The cost of one pip depends on the currency pair and the transaction amount. For all currency pairs except the Japanese Yen, the pip is 0.0001. For Yen, its value is 0.01. In the example with the EUR / USD currency pair, we entered the transaction in a standard lot (100,000 US dollars) and to calculate the cost of one pip, we need to multiply 100,000 by the pip value, i.e. by 0.0001, and as a result, we find out that the cost one point is 10 US dollars. Thus, in the considered example, our earnings amounted to 50 US dollars
Price Bid and Ask
When making transactions with non-deliverable OTC financial instruments, you get two prices: Ask (buy) and Bid (sell).
The bid price is always lower than the ask price, and the difference between the bid and ask price is called the spread, which is also one of the costs of opening a position in any market.
For example, on your trading platform, EURUSD is trading at 1.2683 / 1.2685, this will mean that the bid price is 1.2683 and the Ask price is 1.2685.
When you open a long position or “buy” a certain financial instrument, your position will be open at the Ask price and closed at the Bid price. On the other hand, when you open a short position or “sell” a certain financial instrument, your position will be opened at the bid price and closed at the ask price.
The spread in the OTC market is the difference between the bid price and the ask price of an instrument. When making transactions on the OTC Forex market, the spread is also the main cost of opening a position. The narrower the spread, the lower the cost of opening a position. The wider the spread, the higher the cost. You can also consider the spread as the minimum movement that the market should make in your direction, before you can begin to fix the financial result.
For example, suppose our EUR / USD market is quoted with Ask price of 1.2685 and Bid price of 1.2683, so the spread is calculated by subtracting 1.2685 from 1.2683, which gives a total spread of 0,0002 or 2 pips (points). As soon as you open a transaction in the EUR / USD market, and the market moves at least 2 pips (points) in your favor, it is then that your transaction will begin to make a profit. This is also the reason that at the time of opening a transaction, you immediately get a loss.
How to understand the cost of spread using xStation 5
However, one of the functions of xStation is an advanced trading calculator that instantly determines the value of the spread depending on the size of the transaction. In the above example (Fig. 1), a 0.2 lot deal on EUR / USD with a difference of 2 pips (points) gives a monetary value of $ 4 per spread.
Stop Loss (Stop Loss, S / L)
Experienced clients claim that one of the ways to achieve success in the over-the-counter Forex market in the long run is prudent risk management. Using Stop Loss is one of the most popular ways to manage risk without a time limit.
What is a Stop Loss Order?
Stop-loss order is a type of closing that allows the client to specify a certain price level in the market, upon reaching which, the transaction will be automatically closed by the investment platform, usually with losses.
Let's look at the example above. The client opened a long position on EUR / USD in anticipation that it would increase in price above 1.26953, which is shown by the first line. The client placed a Stop Loss order at the price of 1.26879. This means that if the market falls below this level, the client’s position will be automatically closed at a loss - and, therefore, the client will be protected from any additional price losses. Stop loss helps manage your risk and limit your losses to an acceptable and controlled minimum amount.
Although Stop Loss Orders are one of the best ways to manage your risk, they do not provide 100 percent security. If the market suddenly becomes unstable and trades with gaps (jumping from one price to another without trading at the levels between them), your position may be closed at a worse level compared to the request. This is called price slippage.
Take Profit Order (Take Profit, T / P)
A take profit order is an order that closes your position when it reaches a certain price and a certain level of financial result. When the price in the market reaches the Take Profit established by the order, the transaction closes at the current market value.
Let's look at the following example (Fig. 3). The client opened a short position on EUR / USD in anticipation of a decrease in value below 1.26891, as can be seen on the first line. The bottom line, Take Profit order, is set to 1.26840. This means that if the market falls to this level, the client’s position will be automatically closed with fixing the financial result.