Forex Trading: leverage, lots and rollover
Before you can start trading Forex you need to understand the main features of CFDs. In this article we look at some important factors that are essential in Forex trading: the leverage, lots, and effects of a rollover.
The great advantage of trading Forex through CFDs is the fact that you can trade with leverage. The leverage is always a ratio, for example 50:1. In case of a leverage of 50:1 and a deposit of € 1,000 you can trade with a value of up to € 50,000. Thus, the leverage actually allows people with relatively little money to trade Forex and make large profits.
After all, the exchange rate of currency pairs differs only a couple of cents each day. By making use of a leverage you can open larger positions, making it possible to obtain high yields from that relatively small price movement.
Learn more about trading with leverage? Read the article about leverage!
Another major advantage of trading Forex through CFDs is the fact that you can trade in lots. Usually huge amounts are traded on the Forex market and normally it would not be possible to open a position of just 1000 euro. However Forex brokers divide a single contract into multiple small contracts which make it is possible to open smaller positions.
• Micro: 1,000 of a given currency
• Mini: 10,000 of a given currency
• Standard: 100,000 of a given currency
Summary: lots make it possible to open small positions.
Due to the previously described leverage, it is possible to open positions worth tens of thousands of Euros with only a thousand Euros on your account. The funding in this case is in large part regulated by the broker, the trader only needs to finance a very small part of the position. For example: when the leverage is 20:1 you only have to fund 4% of the position. This margin is called the initial margin. Some brokers also apply a maintenance margin, a portion of your balance that must be available to keep the position opened.
CFDs are contracts that eventually require delivery. As a trader, however you do not always want this and instead you wish to hold your Forex position. This is possible because brokers use a rollover, the position is closed, but immediately a new similar position is opened. That way you can continue to trade and any capital gains or losses still are visible in your account balance.
Every Forex position is opened by borrowing money in one currency then use it to buy another currency. You will have to pay interest over the money your sell and you will receive interest over the money you buy. At the end of each trading day these interest payment will be conducted. If the currency you are buying has a higher interest rate than the currency you are selling, you will receive interest and when the opposite is the case you will have to pay interest.
The exact ratios and financing costs depend on the terms of the broker. You can read more about the costs of CFD trading in our article about the costs of CFD trading.