![]() ![]() So, for instance, for EUR/USD, the pip = 0.0001 USD, but for USD/EUR, the pip = 0.0001 Euro. (See Currency Quotes Pips Bid/Ask Quotes Cross Currency Quotes for an introduction.)īecause the quote currency of a currency pair is the quoted price (hence, the name), the value of the pip is in the quote currency. Since there are about 100+ yen to 1 USD, a pip in USD is close in value to a pip in JPY. A well known exception is for the Japanese yen ( JPY) in which a pip is worth 1% of the yen, because the yen has little value compared to other currencies. 01% of the quote currency, thus, 10,000 pips = 1 unit of currency. ![]() Leverage is inversely proportional to margin, summarized by the following 2 formulas:Ī pip =. The amount of leverage the broker allows determines the amount of margin that you must maintain. Often, only the leverage is quoted, since the denominator of the leverage ratio is always 1. For US traders, the base currency is USD. The leverage ratio is based on the notional value of the contract, using the value of the base currency, which is usually the domestic currency. Instead of a margin call, the broker may simply close out your largest money-losing positions until the required margin has been restored. Thus, it is never wise to use 100% of your margin for trades - otherwise, you may be subject to a margin call. Your total equity determines how much margin you have left, and if you have open positions, total equity will vary continuously as market prices change. Total Equity = Cash + Open Position Profits - Open Position Losses The equity in your account is the total amount of cash and the amount of unrealized profits in your open positions minus the losses in your open positions. The margin requirement can be met not only with money, but also with profitable open positions. Thus, buying or selling currency is like buying or selling futures rather than stocks. So if you buy $100,000 worth of currency, you are not depositing $2,000 and borrowing $98,000 for the purchase. Thus, no interest is charged for using leverage. In most forex transactions, nothing is bought or sold, only the agreements to buy or sell are exchanged, so borrowing is unnecessary. ![]() The margin in a forex account is often called a performance bond, because it is not borrowed money but only the equity needed to ensure that you can cover your losses. The purpose of restricting the leverage ratio is to limit the risk. In other words, the minimum margin requirement is set at 2%. Since then, the allowed ratio for US customers has been reduced even further, to 50:1, even if the broker is located in another country, so a trader with a $100 deposit can only trade up to $5000 worth of currencies. However, in 2010, US regulations limited the ratio to 100:1. Such leverage ratios are still sometimes advertised by offshore brokers. ![]() Note, however, that there is considerable risk in forex trading, so you may be subject to margin calls when currency exchange rates change rapidly.īefore 2010, most brokers allowed substantial leverage ratios, sometimes up to 400:1, where a $100 deposit would allow a trader to trade up to $40,000 worth of currency. Because currency prices do not vary substantially, much lower margin requirements are less risky than it would be for stocks. Stocks can double or triple in price, or fall to zero currency never does. This is why profits and losses vary greatly in forex trading even though currency prices do not change all that much - certainly not like stocks. Most forex brokers allow a very high leverage ratio, or, to put it differently, have very low margin requirements. ![]()
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