Do you want to learn about Forex? Forex trading is one of the most potential jobs today. The benefits it brings are quite attractive such as flexibility, freedom of working time, place of work, starting with small capital, etc. You can accumulate your capital gradually to increase the trading volume. If you are curious to learn about Olymp Trade Forex, this article will help you better understand this form of financial investment.
What is Forex?
Forex stands for “Foreign Exchange”, which means foreign currencies exchange. We often call it a foreign exchange market in which we buy or sell currencies.
Initially, the Forex market was a place reserved for large investors and banks with strong financial capacity. However, with the increasing participation of small individual investors, the market gradually changed. Today, anyone can participate in Forex trading by a few steps on the internet.
Learn about Forex in Olymp Trade
To calculate the potential profit and risk encountered in every trade, you need to understand the concepts including Margin, Margin level, Leverage, Equity, etc. They will be explained in detail in the following section.
What is Leverage?
Leverage is a feature provided by platforms that support investors with small capital to open orders in large volumes.
How leverage works
In real life, if you have $1 you can only buy items worth $1. Regarding this case, the leverage is 1:1.
In the forex market, if you use the 100:1 leverage, you can buy an item that costs $100 for just $1.
In the current market, the exchange rate of EUR/USD is 1.10.
That means 1 euro is equivalent to 1.10 dollars. In other words, to buy 1 EUR, the buyer must pay 1.10 USD, and to buy 100 EUR, he must pay 110 USD.
Next, you trade on the Forex market. One day after you bought 100 EUR, the market rate changes. At this time, 1 EUR is equal to 1.15 USD (EUR/USD = 1.15). You will make a profit of $0.05 per EUR, which is $5 for 100 EUR.
You may find that this $5 profit is too small. Because if there is no news or important event, the value of the currency cannot change in a short time. If the investor wants more than $5 profits, he must wait for a very long time. It can last many months but the results may come out not as expected. So, what if the investor wants a quick profit?
He can simply increase the trading volume. Instead of buying 100 EUR, he will now buy 1000 EUR.
What if he can’t afford to buy 1000 EUR? At this time, investors will need leverage to increase profits quickly. When using leverage, you can buy 1000 EUR for just 110 USD.
Hearing this, new people will find it strange that this is not true at all. Platforms will not give you money without demanding anything, won’t they? Let’s follow up. You will understand why brokers let you use leverage.
Why does leverage exist?
This deems to be a mandatory principle to understand when trading Forex. If you buy 1,000 EUR for 1,100 USD, you cannot risk up to 1,100 USD. You only go empty-handed when the value of the EUR is zero. Then, the EUR is no different than a useless note.
The leverage is based on this principle. Suppose that you don’t use leverage, you use 100 USD to buy EUR. Brokers understand that no matter how much the price changes, the EUR is still valid. You cannot lose all 100 USD no matter how much the EUR price drops.
Therefore, they offer you leverage, meaning that the platform lends you more capital to buy more EUR. Let’s say, with the x100 leverage, from $100 you would have $10,000. Using this $10,000 to buy EUR, you will be able to buy more EUR and earn faster. But in the case of EUR depreciation, of course, the broker will not suffer a loss. When the EUR drops and the value of the EUR you buy drops from $10,000 to $9,900, they will close your trade. So now you have lost your $100 initial capital.
When you step into financial investment, you should understand the higher the profits, the higher the risk. Leverage is a tool to help you make a profit quickly, but also increase the risk you encounter.
The account balance is the total amount of money you have in the account. When you do not open any positions, the account balance is the available amount that can be used to trade or withdraw.
When you are entering a trade, your account balance is just the amount you have in total after the last transaction was closed. If your trade is losing, your estimated balance will be lower than your account balance. Conversely, if your trade is profitable, your estimated balance will be higher than your account balance.
Equity is your actual account balance. When no trade takes place, equity is equal to the account balance. If you are opening a position, it will be calculated as follows:
Equity = Balance + Floating Profit/Loss.
You have an account balance of $1,000. You are in a losing trade of $100, then your equity is $1,000 – $100 = $900.
Otherwise, you have an account balance of $1,000. You are in a profitable trade of $100, then your equity is $1,000 + $100 = $1,100.
Margin (Required Margin)
In short, the required margin is the amount of money you need to start a trade. You can understand this is a form of deposit to start a trade.
Margin is calculated based on leverage.
In case you do not use leverage, it is calculated as follows:
Assuming the exchange rate of EUR/USD is 1.1500, each EUR is equivalent to 1.15 USD.
Your balance is $10,000. Let’s say you want to buy 1,000 EUR in USD. The required margin you need to spend is 1,000 x 1.1500 = $1,150.
That means you have to deposit $1,150 to open this position. In your account now, there is only $10,000 – $1,150 = $8,850 left. This is the amount you can use to enter other trades or withdraw.
When you exit a trade, this deposit is returned to your account.
In case you use leverage
Let’s say you use the 100:1 leverage. To buy 1,000 EUR in USD, you only need to pay 1/100 of what you need to pay when you don’t use leverage.
The exchange rate of EUR/USD is 1.1500.
The required margin you need for buying 1,000 EUR is 1,150/100 = 115 USD.
Free margin = Equity – Margin.
The Free margin is the difference between equity and the required margin.
For example, your balance is $2,000. In your account, you are opening 3 trades with the required margin totaling $500. Your trades are making $100 of profit.
In this case:
Equity = $2,000+ $100 = $2,100.
Free margin = $2,100 – $500 = $1,600.
Margin Level = (Equity/Margin) x 100%
This is the value used as a criterion to assess whether investors can continue to enter a trade. Different platforms have different required margin levels. You need to find out this information before starting to deposit money on the platform. The most commonly applied limit is 100%.
The reason why the common limit is set at 100% is that your equity is then equal to the required margin.
For example, your equity is $500. The required margin for your open trades is also $500. Margin level = 500/500 x 100% = 100%. So you have no equity to open new trades.
The broker has no other choice but to restrict you from opening a trade.
This limit is also known as the Margin Call Level. This is an important concept when trading Forex.
100% Margin Call Level means your margin level has dropped to 100%.
Unless your open trades are profitable that make your equity increase, you will not be able to open new trades. In case your open trades continue to gradually lose more, it makes the margin level lower and lower than 100%. The platform will close your trades on its own to avoid losing more than you have in your account. This is called Stop Out.
What is Stop Out?
The stop out is determined based on the margin level. Each broker has its own stop out.
If the stop out of the trading platform you are participating in is 5%, it means when your margin level drops to 5%, the platform will close your trades automatically. In case you open a lot of trades, the broker will close the position that is losing the most.
When the most unprofitable positions are closed, your margin level will increase. Other trades will operate normally until your margin level reaches the stop out.
Any broker has the right to automatically close your trade without noticing in advance when the margin level reaches the stop out. You should note this when preparing to open consecutive trading orders. Although your order has not reached the stop-loss, it is still closed.
Stop out is essential to ensure the rights of traders. If brokers do not set a stop out and the price continues to go against the predicted direction, when a loss occurs, your account can go below zero. Closing trades will prevent you from losing more than you have on your account.
Typical Forex trading orders in Olymp Trade
Your predictions may be correct or not, but the profit rate is many times more than the investment. Typically, it is the order using the EUR/USD pair with the entry point on July 21 which correctly predicted the uptrend. The next day, I was able to receive a profit which was 5 times more than the initial investment.
You may only win 5 out of 10 orders but you still have regular profit compared to Fixed Time Trade. This is a great plus point of Olymp Trade Forex compared to other investment channels that require a win rate of more than 50% to be profitable. It is possible to place Forex orders over a long period of days or weeks, sometimes months, depending on each trader. It will save you time when you trade with long time frames because each day, you only need to open the chart a couple of times.
The last line
If your psychology is not stable, you should not trade in short time frames. If Fixed Time Trade makes it impossible for you to trade in long time frames, you can place a Forex order. But before starting trading, learn the basics of Forex carefully.
In case you have little time and still want to make passive money from trading, Olymp Trade Forex is the most appropriate choice for you. A Demo account will help you experience how the Forex money-making channel works in Olymp Trade.