Forex trading is becoming more and more popular among everyday Australians. Many people are interested in earning an income from home with the convenience of online trades, but they may not be aware that forex brokers are located worldwide. Each country has different regulations, depending on the rules imposed by the government or other industry organizations or groups.
As you probably know already, a pip is simply another name for a percentage point. It can also mean “price interest point”, which means something similar to a percentage increase or decrease in price. Much like stocks and commodities, forex prices fluctuate constantly, and a pip is used to show this change in value every time the market moves.
Since brokers set specific margin requirements (the amount of money you need to open an account), each one calculates the value of a pip slightly differently. Most brokers will round off to the nearest five pips at the end of the day because that is easier for them, although some may use other numbers such as 10 or 15.
Most retail forex traders will trade with amounts smaller than $1,000 and require more delicate increments than just whole pips. They might want to know what percentage increase or decrease each price move represents to calculate profits and losses before closing out trades accurately. Once you’ve opened a live trading account, trading platforms should provide this information.
Your broker will have set you a minimum or maximum amount that you can deposit into your account. The requirement is known as the margin requirement. If you want to trade currencies, your broker’s margin requirements will be in terms of USD. However, if you’re trading commodities or stocks instead, they may be in any other currency unit (like EUR).
Once you’ve opened an account with a forex broker and deposited funds there, you’ll need to make sure that it’s worth at least 1% more than your initial deposit. So, if it costs $100 to open an account with them because they use 1:100 leverage, for example, you should always keep at least $1,000 in there. If you only have $200 worth of funds, though, then your broker will close down your account and take all of your money because it doesn’t meet the minimum requirement.
Let’s say that you want to trade with $1,000 in your account using a 100:1 leverage ratio (so you’ve deposited $100). One pip amounts to 0.0001, so if you multiply this amount by 0.01 (the value of one pip for every 100 units), you’ll end up with 0.00000100 or 1/100th of a cent each time your market changes direction (up or down).
If you deposit the required minimum of $1,000 into your account, you can afford to trade without worrying about losing it all at once. This means that you’ll have 100 times more money on hand or 10,000 units ($100 / 0.00000100 = 1,000 x 0.0001 = 1 unit).
Margin forex trading allows you to use leverage and borrow additional funds from your broker so that you can invest even more money in the market. If you trade with $1,000 and place a 5:1 leverage ratio, for example ($500 initial deposit), then you would only need to risk 0.2% of your trading capital per position: this means that each pip is worth $0.000020 or 20 cents (1000 / 0.000020 = 500 x 0.000005).
Some brokers will allow you to carry out forex margin trading without requiring any minimum deposit at all. This might be something to consider when looking around the market because it could save you hundreds in fees and commissions if you’re not too concerned about losing money over time either. Alternatively, if only $200 is required to open an account, but withdrawals cost $100, then you might want to consider using stop-loss orders because it’ll be easier to ensure that your money is always protected. Have a look at the minimum requirement on Saxo.