Understanding The Forex Lingo(2).

Measuring the Transaction Cost:

The important aspect of the bid-ask spread is that this is used to measure the transaction cost of a round turn trade. A round turn is defined as both a buy trade and an offset sell trade having the same size of similar currency pair. In the example using the EUR/USD exchange rate of 1.2812/15, the transaction cost will be equal to three pips.

Here is the formula for calculating the transaction cost:

Transaction cost = Ask Price – Bid Price

Knowing the Cross Currency:

When you refer to cross currency, it means any pair where the U.S. Dollar is absent. If you trade in cross currency, you might experience erratic behavior or movement of price. That’s because you triggered an action which actually involves two USD trades.

Here is an example: a long Buy EUR/GBP is equals to buying EUR/USD while selling GBP/USD. The transaction cost for cross currency trades are normally higher.
Recognizing the Margin

If you open a new margin account with any Forex broker, you will be required to deposit a minimum amount in your account. The minimum deposit varies from broker to broker. This could be as low as $100 or can be higher up to $100,000.

When you execute a trade a percentage of the balance in you account will be allocated by the broker. This is called initial margin requirement. The basis of this margin requirement are underlying currency pair, existing price, and lots traded. The size of the lots is based always on the base currency.

If you have a mini account with a leverage of 200:1 or 5 percent margin, you will trade in mini lots. 1 mini lot will be equivalent $10,000. You will only need $50 for this mini lot ($10,000 x .5% = $50).

Recognizing the Leverage:

Leverage in Forex allows increasing trading accounts values by literally allowing traders operate with virtual money. For each real dollar trades fund their account with, Forex brokers ad more funds, increasing traders buying/selling capabilties on the currency market. A leverage of 200:1, for example means that for each dollar invested a broker adds 200 dollers on top, making the trading account 200 times larger. Thus, funding your account with $1000 at 200:1 leverage would enable you to oprate a $200 000 account.

Only traders with really large accounts may afford trading Forex without leverage. For all other traders leveraging their investments is often the only way to participate in Forex currency trading and be able to operate large trading lots while make reasonalbe profits from trading forex.

Understanding the Margin Call:

You have to be ware of margin call because all traders fear this. A margin call occurs when the broker tells you that you do not have sufficient balance in your account. This could be a result of losing an open position.

Margin trading is profitable. However you need to understand its risks. Be very sure that you thoroughly understand your margin account. You also have to read the margin agreement of the broker. You should ask your broker about this before you agree to anything.

If your account falls below the required security margin, some or all of your open positions will be closed and liquidated. There are cases when a margin call will not be received before the open positions are liquidated.

You can avoid margin calls by monitoring your existing balance. You also have to employ stop loss orders on all positions. This will minimize your risk.