Most novice Forex traders don’t understand the difference between a profit and loss. They think that “profit” means “net profit from trading“, and that “loss” means “net loss from trading”. The truth is that they are very different things. Price (how much the market price has changed from the buying price) is the most obvious example of profit. Loss and price are related in other ways, and understanding these concepts is absolutely essential to becoming a successful Forex trader. Here is an explanation.
Every time you make a purchase or sell on a Forex exchange, you are making a deposit. The money used to make the deposit is known as your margin. Your margin is typically maintained by a broker, although individual traders can open their own accounts. When you place a trade on an exchange, you are creating a “deposit” by writing a check against the funds in your account. When selling the currency in question, you are making a profit from the difference between the buying price and the selling price.
Your margin requirement determines the maximum amount you are allowed to borrow at any one time. This requirement is specified in your trading agreement. You may be able to increase your margin requirements as you become more experienced, but the more expensive your margin requirements, the more leverage you will have available to you. Leverage is the ability to manipulate the price of a security through leverage – that is, the higher the amount of your deposit, the greater your ability to gain profit.
Every successful Forex trader knows that there is no exact science to predicting where the market will go. Some people make their entire living trading currencies, while others lose everything in a bad move. There is, however, a mathematical way to determine if a currency’s value will go up or down over time. If you use a floating point system to calculate this, chances are very good that you can predict the range of prices for a specific currency and use that information to attempt to make educated guesses about how the value of that currency will evolve over time.
Many traders use a method called “carry trade.” A carry trade involves the buying and selling of a certain amount of foreign currency with the expectation that you will gain profit in the process. A carry trade generally does not involve a stop loss, which means that you do not have a fixed price you will lose all of your money at the end of the transaction. The profit and loss statement you receive after executing a carry trade represents the gain or loss you have incurred, less the amount of the carry trade.
A margin call occurs when a trader has used all of his or her capital to execute a single trade and wants to be paid out by the seller. This is known as a margin call. A margin call results when the broker behind the curtain calls your broker for payment for all of your capital. Using leverage to obtain increased leverage also increases the risk of a margin call because you are leveraging too much of your account.
Another example is when you buy from a dealer in the United Kingdom but in your country of residence. The price of the British pound changes greatly between the time you purchase and the time you sell. The exact same thing can happen when you buy from a dealer in Germany but the price of the German mark changes significantly from the time you purchase to the time you sell. If you know the difference in the closing price in each country, you can make accurate comparisons between currencies so that you can get accurate quotes for the exchange rate between our two countries.
This example illustrates the fact that the quote currency is not necessarily the only indicator of the exchange rate between our two countries. It is important to use other indicators to determine the correct price for our transaction. If you are able to correctly read the news, then you should be able to use the other indicators to guide you as to how much you should pay or buy. In this example, if you use the Euro as the quote currency, then you will be buying 100,000 Euros of goods from Germany. If you were using the British pound, then you would be selling the goods back to Germany.