Know When to Buy or Sell a Currency Pair
Trading in “Lots”
Imagine going to a shop and wanting just one egg. But they don’t sell single eggs. They sell them in boxes of 12. That’s like a group or “lot” of eggs.
In foreign currency trading, it’s similar. You don’t buy just 1 unit of a currency. They’re usually grouped into “lots” like 1,000 units, 10,000 units, or 100,000 units.
Margin Trading
Think of it this way: You want to buy a toy that costs $100, but you only have $10. A friend says, “No worries, just give me the $10, and I’ll lend you the toy.” That’s leverage.
In trading, you can control a large amount with just a small deposit. This deposit is called “margin”. So if there’s a 2% margin, you can control $100,000 with just $2,000.
An Example
Imagine you think the value of the British pound will rise against the US dollar. You decide to buy a lot (100,000 units) of GBP/USD. This means you’re buying pounds worth $150,000. But, you only need to deposit $3,000 to do this. If the value goes up a tiny bit, you can make a profit. For instance, in this example, you made $500. But be careful, because you can also lose money just as fast.
Risks with Leverage
It’s like riding a fast bike. It can be exciting when you speed and reach your destination quickly. But if you’re not careful, you can crash. In trading, using a lot of leverage (like controlling $100,000 with just $1,000) can be risky. A small change in price can either make you a lot of money or lose all of it.
Rollover (Daily Fees)
If you leave your trade open past a certain time (usually 5:00 pm), you might either get charged a small fee or earn some money. This is because of interest rates linked to the currencies you’re trading. If you don’t want this, close your trades before that time.
In simple terms, you either pay interest on the money you borrowed or earn interest on the money you bought. Sometimes you might have to pay, and other times you might earn.
Different brokers might have different rates for these fees, so it’s always good to check with them.
Trading currencies is a bit like shopping in bulk and using a friend’s money to get something expensive. But remember, it comes with its risks. Always be careful and understand the rules.