Trading Basics Product Schedule
Margin is the amount of money needed as a “good faith deposit” to open a position with your broker.
Margin is the amount of money that a trader needs to put forward to open a trade. When trading forex on margin, you only need to pay a percentage of the full value of the position to open a trade.
Margin is one of the most important concepts to understand when it comes to leveraged forex trading. Margin is not a transaction cost.
For example, In forex to control a $100,000 position, your broker will set aside $1,000 from your account. Your leverage, which is expressed in ratios, is now 100:1. You’re now controlling $100,000 with $1,000.
The $1,000 deposit is “margin” you had to give to use leverage.
Margin is used by your broker to maintain your position. Your broker basically takes your margin deposit and pools them with everyone else’s margin deposits and uses this one “super margin deposit” to be able to place trades within the interbank network.
Margin is usually expressed as a percentage of the full amount of the position. For example, most forex brokers say they require 2%, 1%, 0.5% or 0.25% margin.
Based on the margin required by your broker, you can calculate the maximum leverage you can wield with your trading account. If your broker requires 2% margin, you have a leverage of 50:1.
|Margin Requirement||Maximum Leverage|
Aside from “margin requirement”, you will probably see other “margin” terms in your MT4 trading platform
Leverage in forex is a technique that enables traders to ‘borrow’ capital to gain a larger exposure to the forex market, with a comparatively small deposit. One of the reasons why so many people are attracted to trading forex compared to other financial instruments is that with forex, you can usually get much higher leverage than you would with stocks. It offers the potential for traders to magnify potential profits, as well as losses.
The forex market offers some of the lowest margin rates (and therefore highest leverage ratios) compared to other leveraged assets, making it an attractive proposition for forex traders who like to trade using leverage. Forex is traded on margin, with margin rates as low as 1%. A margin rate of 1% can also be referred to as a leverage ratio of 100:1. This means you can open a position worth up to 100 times more than the deposit required to open the trade.
Trading leverage or leveraged trading allows you to control much larger amounts in a trade with a minimal deposit in your account. Leveraged trading also knows as Margin trading. With the help of forex leveraging, a trader can open orders as large as 1,000 times greater than their own capital. In other words, leverage is a way for traders to gain access to much larger volumes than they would initially be able to trade with.
It should be remembered that leverage does not alter the profit potential of a trade; but instead, reduces the amount of equity that you use. Leveraged trading is also considered a double-edged sword, since accounts with higher leverage get affected by large price swings, increasing the chances of triggering a stop-out. Therefore, it is essential to exercise risk management when it comes to leveraged instruments.
For example, A standard lot of ‘1’ on Meta-trader 4 or 5 is equal to 100,000 currency units. In forex to control a $100,000 position, your broker will set aside $1,000 from your account. Your leverage, which is expressed in ratios, is now 100:1. You’re now controlling $100,000 with $1,000.
Margin-Based Leverage = Total Value of Transaction / Margin Required
For example, if you are required to deposit 1% of the total transaction value as margin and you intend to trade one standard lot of USD/CHF, which is equivalent to US$100,000, the margin required would be US$1,000. Thus, your margin-based leverage will be 100:1 (100,000/1,000). For a margin requirement of just 0.25%, the margin-based leverage will be 400:1, using the same formula.
While margin is the deposit amount required to open a trade, leverage is capital borrowed from the broker in order to gain exposure to larger trading positions. Therefore, forex trading on margin enables traders to open larger positions with relatively small deposits. It is important to remember that trading on leverage can be risky as losses, as well as profits, are amplified.
Required Margin = Trade (Contract) Size / Leverage * Account Currency Exchange Rate
Volume in Lots: 1 (One Standard Lot = 100,000 Units)
Account Base Currency: EUR
Currency Pair: EUR/USD
Exchange Rate: 1.19111 (EUR/USD)
Required Margin = 100,000 /100 * 1.19111
Required margin is $1,191.11 USD
When trading, the balance refers to the amount of money a trader has in their trading account. However, it’s important to remember that this amount does not include any profits or losses a trader might have from any open positions. If a trader has an open position, his or her balance might change depending on the losses or profits he or she has made once the trade (or part of the trade) is closed.
A trader’s balance is located in different sections on the trading platform, depending on whether the trader is using the MT4 or the MT5 platform. On the MT4 Client Terminal, the balance is displayed in the Terminal window under the Trade tab. On the MT5, the Balance can be seen in the Toolbox under the Trade tab.
FX equity refers to the absolute value of a Forex trader’s account. When a trader has open positions, their trading platform will factor several parameters into the equity equation.
Equity = (Account balance + Unrealized P/L).
This is the money in your account that is available to open new positions.
Free Margin= (Equity – Used Margin)
As more positions are opened, more of the funds in the trader’s account become used margin. The amount of funds that a trader has left available to open further positions is referred to as available equity, which can be which can be used to calculate the margin level.
So margin level is the ratio of equity in the account to used margin, expressed as a percentage. The formula to calculate margin level is as follows:
Margin level = (equity / used margin) x 100
In forex trading, a Stop Out Level is when your Margin Level falls to a specific percentage (%) level in which one or all your open positions are closed automatically (“liquidated”) by your broker.
This liquidation happens because the trading account can no longer support the open positions due to a lack of margin.
More specifically, the Stop Out Level is when the Equity is lower than a specific percentage of your Used Margin.
Stop Out Level = Margin Level @ 30%.
If this level is reached, your broker will automatically start closing out your trades starting with the most unprofitable one until your Margin Level is back above the Stop Out Level.
Keep in mind that a Stop Out is not discretionary. Once the liquidation process has started, it is usually not possible to stop it since the process is automated.
A ‘lot’ refers to the minimum available transaction size:
Rollover is the interest paid or earned for holding a position overnight. Each currency has an overnight interest rate associated with it, and because forex is traded in pairs, every trade involves not only two different currencies, but their two different interest rates.
Overnight interest rates will guide whether the trader will ultimately pay to hold the position or earn interest. Typically, these interbank rates will track a central bank’s target quite closely, however sharp changes in the supply or demand for a specific currency can shift interbank borrowing rates away from the central bank rates.
Typically, if the interest rate on the currency you bought is higher than the interest rate of the currency you sold, then you will earn rollover (positive roll). If the interest rate on the currency you bought is lower than the interest rate on the currency you sold, then you will pay rollover (negative roll).
It is possible however that both rollover for buying and selling the same pair are negative. As both Banks and GoDo charge a small spread on interest paid or earned.
Any client holding an open position at the end of the trading day (5pm EST) will be credited or debited rollover.
Rollover can add a significant extra cost or profit to your trade. Upcoming Rollover can be viewed in the MT4 terminal each symbol right click specification.
The MT4 terminal automatically calculates and reports all rollover or swap for you.
To see how a trade closed, it is best to run an account statement in MT4.
Log onto MT4 client terminal with your account details. Hover your cursor over ‘Account history’ in terminal window and select the “history period or date range” and Run the statement for the date range of the trade in question.
A Margin Call will occur on a trader’s account when:
- Free Margin is less than 0
- When a trader’s Equity is less than Used Margin
When positions are over-leveraged or trading losses produce insufficient equity to maintain current open positions, a margin call results, and open positions must be liquidated.
Using more leverage can magnify your gains, but it can also magnify losses which will quickly deplete your usable margin. The more leverage you use, the faster your losses can accumulate.
The position size that you can hold in your account using leverage is determined by your account equity and the margin settings in your account.
When you use excessive leverage, a few losing trades can quickly offset many winning trades. To clearly see how this can happen, consider the following example.
- Scenario: Trader A and B both have a $10,000 account balance. Trader A buys 500k (50, 10k lots) of USD/JPY while Trader B buys 50k (5, 10k lots) of USD/JPY.
- Question: What happens to the account equity of Trader A and Trader B’s accounts when the USD/JPY price falls 100 pips against them?
- Answer: Trader A loses $4,150.00, 41.5% and Trader B loses $415, 4.15% of their account equity. By using lower leverage, Trader B drastically reduces the dollar drawdown of a 100 pip loss.
The example below shows how to calculate the value of 1 Pip for one 10K lot of EUR/USD where the base currency of the account is USD:
- Start with 10,000. Multiply 10,000 by .0001 since 1/10,000th is a pip for all pairs (except JPY pairs). 10,000* .0001 = 1.
- You now know each pip is worth 1 USD. That will be valued in the “counter currency” (second currency) of the pair.
- In this example, we are using the EUR/USD, so USD is the counter currency of the pair. Here, 1 pip is worth 1 USD dollar for 1 – 10k lot of EUR/USD.
To learn how to calculate Pip value when your base currency is not the same as the second currency in the pair, please see the example below.
The example below shows how you can calculate the value of 1 Pip for 1 – 10K lot of EUR/GBP where the base currency of the account is USD.
- Start with 10,000. Multiple 10,000 by .0001 since 1/10,000th is a pip for all pairs (except JPY pairs). 10,000* .0001 = “1”.
- You now know each pip is worth “1”. That will be valued in the “counter currency” (second currency) of the pair. In this example, we are using the EUR/GBP, so GBP is the counter currency of the pair.
- Take the current exchange rate of the GBP/USD and multiply it by “1” to calculate the value of 1 pip in your base currency.
- In this example, GBP/USD is trading at $1.38 and 1 Pip for EUR/GBP would be equal to $1.38 USD.
Leverage is a function of the size of your trading position divided by the Margin Requirement.
Therefore the larger the margin requirement the smaller the leverage available.
The amount of leverage offered by GoDo differs depending on the instrument and account types being traded and, for forex, the equity in your account.
For CFD Trading, GoDo currently offers one leverage model. Irrespective of your account equity, the maximum leverage available on any particular CFD instrument is capped at 100:1.
For Forex Trading, GoDo offers default leverage model 100:1
|EQUITY & LEVERAGE TABLE|
|Forex Leverage||Up to 100:1|
|CFD Leverage||Up to 100:1|
The exact leverage available for any instrument is at the sole discretion of GoDo, may be less than the allowed maximum, and is subject to change at any time.
*Equity is your account balance plus the floating profit/loss of your open positions.
The word “PIP” stands for Percentage in Point. In forex, a pip is what you would consider a “point” for calculating profits and losses.
This pip value can be changed by changing the size of your trade via Mt4 terminal Volume field. For example, if the pip value for a 0.01 lot trade is 5 cents, the pip value of a 0.02 lot trade will increase to 10 cents, and so on. (You cannot change the pip value of the 0.01 lots trade from 5 to 10 cents, that is not possible – this value depends on the value of the currencies you are trading as well as the base currency of your account.)
For most currency pairs, the ‘pip’ location is the fourth decimal place. In this example, if the GBP/USD moved from 1.32279 to 1.32289 you would have gained or lost one pip, depending on if you’re long or short. The amount that pip is worth depends on the lot size you open.
If the requested price of a stop or stop entry order is reached at the open of the market on Sunday, the order will be filled at the next available price and may experience negative slippage depending on the change in prices from Friday until Sunday.
MT4 orders are filled the same way. If the requested price is triggered upon the start of trading, the order will be filled at the next available price and may experience positive slippage depending on the change in prices from Friday until Sunday.
To calculate the required margin for your trade, you need to determine a few things:
- The value of the trade
- Your account leverage
Here is an example:
- Let’s say a trader has a USD account and you want to trade one mini lot (10K GBP/USD), that is worth the equivalent of 10,000 GBP.
- We need to convert this number of GBP to a value of the base currency of the trader’s account, in this case USD.
Since GoDo has leverage based margin requirements, For ex: $1.40 for our exchange rate on GBP/USD. So, these 10,000 GBP is worth — 10,000 * $1.40 = $14,000.
Now that we know the value of the trade, $14,000, you can use a leverage profile to determine the amount of margin required to open a trade.
Let’s say the leverage is 400:1, in this case $35 is required in margin ($14,000/400 = $35)
Forex is a commonly used abbreviation for “foreign exchange,” and it is typically used to describe trading in the foreign exchange market by investors and speculators.
For example, imagine a situation where the U.S. dollar is expected to weaken in value relative to the Euro. A Forex trader in this situation will sell dollars and buy euros. If the euro strengthens, the purchasing power to buy dollars has now increased. The trader can now buy back more dollars than they had to begin with, making a profit.
MVA – “Simple Moving Average”
- This moving average gives you the average price for the last N periods. This can show the distance that current price action is away from the average price over those last N periods.
EMA – “Exponential Moving Average”
- This moving average gives you the weighted price calculation for the last N periods. It weights the most recent prices more heavily than later changes in price.
SMMA – “Smoothed Moving Average”
- This moving average gives the recent prices an equal weighting to the historic ones.
P/L is your Profit or Loss in Pips.
Gross P/L is your Profit or Loss in your base currency.
Net P/L is your Gross P/L with commissions and interest.
Day P/L is your Profit or Loss in your base currency for today’s trading session, starting from 5PM EST until 5PM EST the next day. Therefore, your overall trade may be positive, but your platform may display a negative number in this column if the position has moved against you since 5PM EST.
The following indicators are used to view trend strength:
- ADX – “Average Directional Index”
This indicator determines the strength of a prevailing trend. It is important to note it provides a reading for strength of a trend, but does not show the direction of a trend.
- DMI – “Directional Movement Index”
This indicator identifies whether there is a definable trend in the market. It can help identify if a currency pair is trending up or down.
Clients that hold an open position at the time of an GoDo expiration will have their positions closed at our rate during the market break.
When a product expires, all pending Entry orders and Stop/Limit orders that are associated with the expiring contract will be cancelled. To continue trading this product clients will need to re-establish another position after the expiration and reinsert Stop and Limit orders to the new open position
We recommend limiting total account leverage to a maximum of 20:1. For example, if you have an account balance of $10,000, you could trade a maximum position size twenty times larger than your account balance. In this example, 20 X $10,000 = 200,000 (200k total for all positions).
At 20:1 leverage, a market movement of 1% will increase or decrease your account balance by roughly 20%. You can use this simple calculation to determine your risk tolerance. For example, someone who is less risk tolerant may want to leverage their account only five times so that a 1% market movement means a 5% increase or decrease in the account balance.
While greater leverage can increase the magnitude of your gain, it can also increase the magnitude of your loss and chances of receiving a margin call.
- The price levels (or number of pips) you want to set your Stop/Limit
- The amount of capital you wish to risk
- The amount of Usable Margin you have available to open new trades
The smallest trade size you can place on MT4 Terminal is “0.01 lots”. That represents 1,000 units of a currency pair.
Trade size terminology:
- 1k or 1,000 = 1 “Micro Lot”
- 10k or 10,000 Units = 1 “Mini Lot”
- 100k or 100,000 Units = 1 “Standard lot”
When trading Forex on margin, there can be a few ways to determine the required margin for a trade.
Fixed margin means that there is a fixed amount of margin required to open a trade.
- If margins were variable and if you were directly adhering to the 0.25% margin requirements (or 400:1 leverage) would cause margin amounts to change as market rates fluctuate. For traders, this would mean watching not only your trades, but monitoring frequently changing margin levels.
Traders may employ many strategies when trading with GoDo.
Some of these strategies include:
- News trading,
- EA’s (automated Trading)
- API trading.
The “majors” and the “commodity pairs” are the most liquid and most widely traded currency pairs in the Forex market. These pairs and their combinations (EUR/JPY, GBP/JPY, and EUR/GBP) make up the vast majority of all trading in the Forex market. Because these pairs typically have the largest volume of buyers and sellers, they will typically have the tightest spreads.
- Majors: EUR/USD, USD/JPY, GBP/USD, USD/CHF
- Commodity Pairs: AUD/USD, USD/CAD, NZD/USD
When you use excessive leverage, a few losing trades can quickly offset many winning trades.
To clearly see how this can happen, consider the following example:
- Scenario: Trader A buys 50 lots of USD/JPY while Trader B buys 5 lots of USD/JPY.
- Questions: What happens to Trader A and Trader B account equity when the USD/JPY price falls 100 pips against them?
- Answer: Trader A loses 41.5% and Trader B loses 4.15% of their account equity.
|TRADER A||TRADER B|
|Notional Trade Size||$500,000 (Buys 50, 10K lots)||$50,000 (Buys 5, 10K lots)|
|Leverage Used||50:1 (50 times)||5:1 (5 times)|
|100 Pip Loss in Dollars||-$4,150||-$415|
|% Loss of Equity||41.5%||4.15%|
|% of Equity Remaining||58.5%||95.85%|
By using lower leverage, Trader B drastically reduces the dollar drawdown of a 100 pip loss.
There are many reasons to trade Forex:
- Trade Forex 24/5
- Trade Long or Short any pair
- Low trading costs
- Unmatched liquidity (Almost 5 Trillion is traded globally per day)
- Leverage (leverage is a double-edged sword as it can significantly increase your losses as well as your gains.)
Take the idea of buying. What if you bought something (it could literally be almost anything…a house, a piece of jewelry or a stock) and it went up in value. If you sold it at that point, you would have made a profit…the difference between what you paid originally and the greater value that the item is worth now.
Currency trading is the same way…
Say you want to buy the AUDUSD currency pair. If the AUD goes up in value relative to the USD and then you sell it, you will have made a profit. A trader in this example would be buying the AUD and selling the USD at the same time.
For example, if the AUDUSD pair was bought at 1.0615 and the pair moved up to 1.0700 at the time that the trade was closed/exited, the profit on the trade would have been 85 pips.
We recommend having the strongest internet connection possible. At a minimum, a 56K or dial up internet connection is supported but not recommended.
Due to inherent volatility in the markets, it is important that traders have a working and reliable internet connection. There are circumstances when the trader’s personal internet connection may not be maintaining a constant connection with the GoDo servers due to a lack of signal strength from a wireless or dial up connection.
GoDo MT4 Platform allows you to quickly and easily access the Forex market from nearly any computer with an internet connection.
Effective Leverage relates to the amount of leverage that your account is using to control the total value of the positions you have open.
Here is an example:
- Assume you have a Standard Lot of USD/CAD (1 lot on MetaTrader 4), which is worth $100,000.
- Also, assume you have an account that has $20,000.
- Effectively, your $20,000 is controlling $100,000 and the ‘effective leverage’ is $100,000/$20,000 = 5 times or 5:1
- In another examples, assume you open 2 Standard Lots of USD/CAD, which isworth $200,000.
- Also, assume you have an account that has $20,000.
- Effectively, your $20,000 is controlling $200,000 and the ‘effective leverage’ is $200,000/$20,000 = 10 times or 10:1
By default, in the MT4 Terminal, a price is highlighted with a black bull candle when it moves up, and white bear candle when it moves down.
On the charts, if the closing price of a candle or bar is higher than the opening price, then the candlestick/OHLC bar will be green with black candle. If, instead, the closing price is lower than the opening price, then the candlestick will be green with white candle.
The following indicators can show the trend:
- HA – “Heikin-Ashi”
- This indicator helps to identify trends and trend changes more easily. Heiken-Ashi modifies the traditional Japanese Candlestick by sending the open and close values of a trade through a calculation of the average.
- ICH – “Ichimoku”
- This indicator helps to quickly discern and filter “at a glance” the low-probability trading setups from those of higher probability.
- Pivot – “Pivot Levels”
- The indicator shows pivot point and the last period levels. This can show areas where these is possible support or resistance.
- BB – “Bollinger Band”
- This provides a relative definition of high and low based on standard deviations and a simple moving average. Essentially, this helps to bracket price action.
- Donchian Channels
- This indicator is used to identify price breakouts above or below recent price history. The indicator plots recent high and low prices boundaries.
- ATR – “Average True Range”
- This can measure market volatility per N number of periods.
- EW – “Elliot Wave”
- The created waves can generate BUY and SELL signals.
- RSI – “Relative Strength Index”
- This shows the price strength by comparing upward and downward close-to-close movements. RSI will grade the price movement exhibited between candles for the last N periods.
- MACD – “Moving average Convergence/Divergence”
- A trend-following momentum indicator that shows the relationship between two moving averages of prices. It can demonstrate market momentum.
- This shows the location of the current close relative to the high/low range over a set number of periods. Stochastics can help determine when a currency pair is overbought or oversold.
- CCI – “Commodity Channel Index”
- This measures the position of price in relation to its moving average. It can show if a currency pair may be overbought or oversold.
For MetaTrader 4:
MetaTrader 4 charts show only the “Bid” chart by default, which is the sell price. If you are verifying if a Sell trade should have been closed or a Buy trade should have opened, you can add a few pips (the spread) to the highest point of the candle where you think the trade should have triggered. This can help you roughly determine if your price level was reached.
If you would like to see further verify if your trade should have been triggered, it is best to login with your MetaTrader 4 account details (Username & Password)
Slippage is a factor when trading any financial market.
Slippage occurs when the market gaps over prices or because available liquidity, at a given price, has been exhausted. Market gaps normally occur during fast moving markets when a price can jump several pips without trading at prices in between. Similarly, each price has a certain amount of available liquidity. For instance, if the price is 50 and the available liquidity at 50 is 1 million, then an order of 3 million will get slipped, since 3 million is more than the 1 million available at the price of 50.
Slippage can be negative or positive.
When you buy the EUR/USD pair, you are buying the euro, and selling the U.S. dollar to pay for it. If the euro interest rate is 4.00%, and the U.S. rate is 2.25%, you are buying the currency with the higher interest rate, and you will earn rollover — about 1.75% on an annual basis. If you sell the EUR/USD pair, you are selling the currency with the higher interest rate, and you will pay rollover — about 1.75% on an annual basis, since you are paying the euro interest rate and earning the U.S. interest rate.
One of the most popular Forex strategies in the twenty first century has been the “Carry Trade”. The “Carry Trade” takes advantage of both the differences in interest rates between countries and the high available leverage of the Forex market.