metatrader.info

Hi folks,

Today – and in these series of articles – we are going to take the Forex new comers hand and guide them to understand the fundamentals of the Forex.

The trading dream!

All of us know that the shortest (and maybe the only) way to the money is the trading.
We have an imaginary character called Mr. X.
Mr. X wants to trade in cars, he wants to buy cars and sell them when the price increases.
Mr. X has a big problem to start his trading, the Capital. Mr. X has 1000USD and the price of the car he wants to trade in is 10000USD.

Mr. X confident that if he has the 10000USD he can sell the car for 12000USD and make 2000USD net profit.

None want to lend Mr. X the capital to start his trading. And no cars’ company will agree to lend him the car.

The capital problem of Mr. X is the problem facing all the people around the world and killing their trading dream.

The good news is: you can trade without a capital.
Mr. X can buy the car with his small capital and when sell it he can take the 2000USD profit for himself! Yes this is possible with the Margin Basis Trading!

Trading in margin basis:

In this system you shouldn’t pay the whole price of the goods but you can pay a deposit and when you sell the goods you take the net profit for you or you bear the loss.
Mr. X can buy the 10000USD car with his 1000USD deposit with the aid of margin basis trading and when he sell the car for 120000USD he can take the profit and return the 9000USD to the company who sold him the car with the 1000USD deposit.

The company who will sell the car to Mr. X for 1000USD deposit has a condition.
Its condition is: you will not possess the car but we will hold it to you and when you find a customer to buy it we will sell it to him and take the 9000USD the remaining of the car price (10000USD) and give you the profit.

Mr. X agreed with pleasure!

With the trading in margin basis you will not process the goods but you can trade in it and the company holds the goods for you.
You take the whole profit and bear the whole loss.

In our example Mr. X paid the 1000USD and he is searching for a buyer for the car, he didn’t find a price more than 9000USD for the car.
In this case he made a loss of 1000USD. The Company in this case will take the 9000USD from Mr. X plus the deposit of 1000USD.

Mr. X think if he wait for more days the price will go up again and he can make profit, two days later the price went down more and the price of the car now is 8000USD. If Mr. X sold the car at this price he will lose and the company too will loss!!

In the trading in margin basis there’s a rule:
The company couldn’t loss!
So, the company will not wait to the day that the price of the car drop to 8000USD and will ask Mr. X to sell the car at the price 9000USD because any drop in the price means the company will loss too and that can be!

This called “margin call” and we are going to talk about it in more details later!

Now! The most important thing we have to know is: How the company who sold the car to Mr. X gave him a 10000USD car for 1000USD?
This is the leverage!

Leverage:

The company who sold the car to Mr. X gave him the ability to trade in a 10000USD car for 1000USD capital. It had duplicated his capital 10 times and this called 1/10 leverage. Because the company allowed Mr. X to trade 10 x his capital.
If the leverage of this company was 1/100 that means Mr. X can trade in goods equal to 100000 (100 x his capital 1000).

The leverage is the backbone of trading in margin basis.