Let’s say you want to buy the US Dollar, in that case you would choose a Currency Pair with the USD in it, for example USD/GBP. Then you simply would buy the USD/GBP, which means you buy the US Dollar against the British Pound (GBP).
If you instead wanted to sell the USD, you would have sold the USD/GBP.
The currency standing first in the Currency pair, i.e. USD in this example, is called the Base currency.
In your trading you could make use of Stop loss or Limit orders. Stop loss means that you set a price level for how much of the capital in your trading account you could lose, before the trade is shut down automatically. Limit order means that you set a price level and when this price level is achieved, your profit is realized by automatically having your trade closed down.
Profit and loss in a currency trade is measured in PIPs. A PIP is the smallest change possible for a currency rate. A PIP has different value depending on if you’re trading with a Standard Lot or a Mini Lot. More of this below.
In a currency trade, you control a higher amount than the capital you have inserted into your trading account. This is so because the currency rates are changing very little at a time, i.e. their rates are fluctuating with very tiny procentual changes compared to the currencies value. A client who doesn’t trade with several hundred thousands or millions of dollars, can’t possible make a discernible profit without controlling a higher amount than his/her inserted trading capital.
Controlling a higher amount than your inserted capital is called Leverage. You usually trade a Standard Lot and a Standard Lot is the same as 100,000 units of the base currency. When you’re trading with a Standard Lot, 1 PIP equals about $10 (or slightly less depending on what currency pairs are traded).
You could also choose to trade a Mini Lot. A Mini Lot is the same as 10,000 units of the base currency. With a Mini Lot every PIP equals about $1 (or slightly less depending on what currency pairs are traded).
Of course you could trade with more than 1 Lot, which would increase your controlled amount and give you the opportunity to experience bigger profits (or losses).
You could directly adjust how big amount to control with your inserted capital. You do this by adjusting the Leverage. For example could your Leverage be adjusted to 100:1, which means that your inserted capital controls an amount a hundred times bigger. I.e. if you are trading with $100, you control $10,000.
Here at Capitalor our clients are offered Leverage all they way up to 200:1.
There’s also something called Margin requirement, which is basically the same thing as Leverage. Margin means how much of your inserted capital in your trading account, you need as collateral to keep the trade alive.
If you don’t have sufficient capital in your trading account to afford the Margin of a currency trade, that currency trade won’t be executed. Margin also means that when a currency trade turns against you and you lose capital which was required for the Margin, that currency trade will eventually be closed down.
For example, if you execute a currency trade with the Leverage at 100:1 and you control 100,000 (a Standard Lot) you need $1000 in your trading account to use as Margin, to be able to execute that trade. But note, to have $1000 and use everything for Margin is quite risky, because if your capital in your trading account should fall below $1000, the currency trade would be closed down. Furthermore, if all your capital in your trading account is already in use, you can’t execute any additional currency trades.
Instead of executing abovementioned currency trade, it would be better to adjust your Leverage to 200:1 and risk less. For example if you have $2000 equity in your trading account and with 200:1, you could trade 1 Standard Lot. 1 Standard Lot is 100.000 of the base currency and with 200:1 Leverage, you would need $500 as margin for this 1 Lot.
The calculation for this are as follows: 100.000/200=500.
Margin and Leverage could seem quite overwhelming at the first look, but they are not really that hard to grasp. Just open a Demo account (absolutely free) and test for yourself how to buy/sell currencies, get used to how Leverage and Margin works, so when you decide to open a real trading account, you could wholehearted devote yourself to trading currencies without having to ponder the mechanics behind a trade.
Additional thorough information concerning the different components involved in a currency trade could be found here and here.
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