Forex Trading Training : Things that u need to know beforehand
At this point, you probably know the basics of how the forex market functions, from symbols and terminology, to slightly advanced concepts involving leverage, that actually let you control huge sums with just a small fraction of the amount. In short, you know quite a bit. But there are some things that you will probably not be told by your broker unless you specifically ask.
The first of these things is regarding rollovers. Even though USD might be the dominant currency in forex, most Spot forex is traded through London in Great Britain. Say the end of a business day is 10 pm London time. At that point, if you have any open trades, most brokers will automatically rollover your trade to the next day, unless specifically instructed that you wish to take delivery. It is worth noting that if you’re using a leveraged account, you probably don’t have enough capital to complete the transaction as it is. This is why most brokers automatically rollover any open trades at the end of the day. What is of importance here is the way they rollover. What they do is close the trade, and open another equal one at almost the same instant.
Assuming you were long (bought) 1 lot of Euro against USD at 0.99550, and the rate at the end of the day is 0.99570. The broker will close the trade at this rate and open another one at a rate of 0.99571. The 1 pip difference is the interest difference between the two currencies. In operating a lot of $100,000 with just $1,000, you have in essence taken a loan from the broker, and on this loan he charges interest as mentioned above.
The good part is that, simply put, if the currency you’ve bought has a higher overnight interest rate than the one you’ve paid with, you will in fact gain the interest differential; and vice-versa.
Another point worth note is that if you’ve purchased say, Euro for USD, and made a profit; your profit is in Euros and not Dollars until you convert the sum back to the original currency paid with. This can be good or bad, depending on the exchange rate at the time that you convert the profit to your currency, NOT at the time of closing trade. You may instruct your broker to convert your profit/loss as soon as you close trade.
Last but not the least, know that in countries where forex is still not regulated, brokers often don’t segregate their own and their clients’ funds while trading, which can lead to complications at the time of closing trade. Talk to your broker about this regardless of whether forex is regulated in your country or not, and make sure he does the needful.
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