Historically, currencies were traded in specific amounts called lots. The standard size for a lot is , units. There are also mini-lots of 10, and micro-lots of 1, To take advantage of relatively small moves in the exchange rates of currency, we need to trade large amounts in order to see any significant profit or loss. As we have already discussed in our previous article, currency movements are measured in pips and depending on our lot size a pip movement will have a different monetary value.
We are looking for the exchange rate to rise i. This is the equivalent of pips. Therefore lot sizes are crucial in determining how much of a profit or loss we make on the exchange rate movements of currency pairs. We do not have to restrict ourselves to the historical specific amounts of standard, mini and micro. We can enter any amount we wish greater than 1, units. So with a Euro denominated account a fall of 50 pips to Trading with leverage allows traders to enter markets that would be otherwise restricted based on their account size.
Leverage allows traders to open positions for more lots, more contracts, more shares etc. This is what we call our margin. For each position and instrument we open our broker will specify a required margin indicated as a percentage. Margin can therefore be considered a form of collateral for the short-term loan we take from our broker along with the actual instrument itself.
For example, when trading FX pairs the margin may be 0. Other platforms and brokers may only require 0. The margin requirement is always measured in the base currency i.
We call it a charge; however it is possible to earn a positive sum each night too. When trading FX, it is based on the interest rates of the currencies we are buying and selling. So often buying currencies against the Swiss Franc will result in a positive swap. For the most part however an overnight premium will be a charge on our account and again this relates to the size of our position.
The actual percentage is very small each night as it is the annual interest rate divided by days in year. Our broker automatically calculates overnight premiums and they usually take effect after 10pm GMT. Under the trading conditions most brokers will stipulate the swap rates for a buy or sell position on each pair. We multiply this rate by our trade size and divide by like the formula above to know what premium we are charged or we earn.
Above are examples of various swap rates for a sample of FX pairs. We can see that the overnight premium can be positive or negative and depends on whether we are buying or selling the pair. It is important to review the premiums if we plan to leave positions open overnight as it will affect the profit or loss of our position. All brokers should outline their overnight rates under their trading conditions.More...