Margin trading uses borrowed capital – that is what we have seen in the previous material , in other words, the trader takes money from your broker to trading on the Forex market. If you look in more detail , the money – it’s debt obligations. To better understand the material presented in this section , let’s look at the basics of circulation of money at the state level .
Take, for example , a major new power with a working population , industry, but without its currency . In order to run the national currency into circulation , the Central Bank directs the Mint to issue batch of bills according to specific standards , the various merits , but it is not so important. When the banknote is printed , it is necessary to spread them all over the state to get their people and organizations . This is done through commercial banks that borrow from the National Bank money at interest. More precisely, commercial banks receive credit from the Central Bank under a certain percentage . This is a very important moment in the monetary relations of any state. That central bank sets the interest rate that , for example, in Russia it is called refinancing and abroad , it may be called key bank rate, base rate, interest rate , etc.
It is believed that the percentage difference has arisen banks compensated for by the formation of new products and services , because there is a paradox – how can you give away more money than there is in the state? After all, there is the bulk of the money issued by the Central Bank , plus interest , which arise as a consequence of the credit. But, this is a topic for another article , but now back to our virtual state.
So now we have our state money . Commercial banks are beginning to lend to individuals and organizations with interest larger than the percentage set by the National Bank refinancing . Of course , the banks do not do it just so, and profiting on the difference between these percentages . Various business firms organize , produce goods or services that use labor , pay taxes , spending borrowed funds , as well as receiving income from their activities , pay to the commercial banks, and they in turn give money to the Central Bank . Thus, the state is saturated with money and as a result – the monetary chain closes. Something like this , very simply, the money is spent by the state and we need to be aware of this in order to understand the principles of Forex trading .
Rate charged by the National Bank – one of the main factors of inflation in the country. And inflation – this is the increase in the quantity of money in circulation , that is, money is becoming more and you can buy more if the market reacts higher prices for goods and services , resulting in a money losing its value . If the goods and services created enough in order to cover the money supply , the depreciation of money slows down, or even a recession occurs . But often the growth of the money supply exceeds the cost of products and services and in order to reduce inflation , reduce the money supply in the state, and this can be done in different ways , and one of them – is to increase the refinancing rate. If the central bank increases the interest rate, the commercial banks also increased her , then organizations are less credit , reduced production, stopped paying wages – reduced level of money supply in the country , but the negative side of such action is that it lowers the level of production, an increase in the unemployment rate and as a consequence – the decline in living standards . This example shows how interconnected processes taking place in the state, sometimes in order to achieve one thing – it is necessary to sacrifice the other and vice versa.
Let’s look at how to be able to use the internet for yourself a trader in the foreign exchange market this most refinancing . Suppose that we are going to buy the U.S. currency for Yen ( quotation USD / JPY). Your broker we open an account with $ 1,000 and can buy dollars for yen, although technically we do not have yen. We take the yen in debt to our broker and buy U.S. dollars , or more precisely the broker buys dollars for yen on our behalf and they are at it , we can not dispose of them , and we can only sell back of the Japanese currency , or close a position at a loss , or profit. In other words , we give a loan broker bought dollars, and for this we are taking a loan from a broker yen.
When we take the money in debt , we are required to pay a corresponding percentage , as these funds are taken on credit. On the Forex market , all transactions are carried out at the level of the world’s banks , so use the interest rate established by the Central Banks of various powers. That is, if we borrowed yen , it shall pay interest at the rate of the Central Bank of Japan, and if we took the U.S. dollar , we are obliged to pay at the rate of National Bank of the United States, and it is very important here is the fact that different countries have different interest rates . Credit rate is normally determined as a percentage (%) per year. In the U.S., for example at the time of this writing , the refinancing rate is at 3% and 0.5 % in Japan . So our broker pays taken from us in debt U.S. dollars at 3% finished , if that position is closed during the day. All rates are calculated and recalculated every day for positions that are open . If our position is closed on the same day , the percentage we do not get (or do not pay ) .
Here’s an example , let’s rate quotes USD / JPY has not changed over the last month and we are at the end of the month we close a long position , then we have to pay our brokers 0.5 % per annum for one month ( as he told us to “borrow ” the yen ) , that is, where – is 0.04 %, and the broker has to pay us 3% for the month ( as we lent him a dollar ) , ie 0.25 % of the dollar amount. Amount we will pay in yen and the amount which results in dollars, equal to the size of the position or size of one lot , mini – or micro- lots.
Another example , let’s say that was open long position ( buying dollars for yen ) one mini lot ( 10,000 USD), then we have earned on the difference in rates of central banks 0.21% of the lot size , in this case 21 USD. However , if we opened a short position on USD ( would sell dollars for yen ) , then we would have lost that $ 21 because of the interest margin. This difference is referred to as the environment Forex bank interest (interest). Bank interest is always charged on the bought currency and the currency used is paid for . This important part of any trader should know .
Thus a profit in the Forex market can be not only due to fluctuations in exchange rates , but also on the difference in interest rates by central banks of various countries. This kind of trading when using the difference in interest rates is called carry trading. It is also noteworthy that not all brokers pay bank interest, and there are those who prefer to only earn income on the rate , but not to pay for it, and some of the interest rate may vary from the Central Bank , and significantly , and may vary depending on the various conditions. That is why every trader needs to know how his broker to bank interest , before he make a deposit.
Buying and selling currencies in the Forex market , you should definitely be aware of the complex components of your income and expenses , so as not to result from losses and maximize profits. It is important to understand that the interest may be part of and income and expenses , so when planning sales for steady profits should not only cover the spread , but also the potential losses caused by the difference in interest rates of banks in different countries. Therefore it is necessary to know how your broker to bank interest and, accordingly, do interest rates of central banks in different currencies.
These are all terms and concepts can easily confuse the novice online trader , because it immediately bombarded with information flow , so if you do not want to immediately climb into the jungle , just do not leave the open positions on the night (overnight). Use afternoon trading , while bank interest is not calculated if the position was opened and closed on the same day .
Forex Academy section details the story of the strategy and tactics of trading , you can always look into this delicate moment . As mentioned earlier, during the holidays, weekends or active trading on the Forex suspended. This leads to uneven settlement bank interest during the weekly session of trading.
In other words, on holidays and weekends it is not calculated and transferred to the working days . Thus, we can get the situation when in the middle of the week, for example , on Wednesday, comes three sevenths of mutual interest on a bank . That’s why brokers publish special tables showing the distribution of mutual interest on a bank , but it must be remembered that the bank interest is calculated daily , regardless of brokers.
At the moment, the lowest interest rate refinance operates in Japan, which is undoubtedly a very big plus for the carry traders. It is noteworthy also that the interest rate of the Central Bank of Singapore is calculated on the basis of trading on the Forex market and is in constant change . And one of the key points is that banks in different countries vary refinancing rate for the regulation of domestic and foreign economic , and social processes , so traders are encouraged to continuously monitor the economic information in order to respond more adequately to changes in the market and get the most profit.