Trading Forex
Hi folks, Today, and in these series of articles, we are going to take the Forex newcomers by the hand and guide them to a better understanding of the fundamentals of the Forex. The trading dream! |
No one wants to lend Mr. X the capital to start his trading. And, no car company will
agree to lend him the car.
Mr. X’s problem with capital is the same problem being faced by people around the
world, and it’s killing their trading dream.
The good news is that you can trade without a capital.
Mr. X can buy the car with his small capital. And, when it sells, he can take the
2000USD profit for himself! Yes, this is possible with Margin Basis Trading!
Trading in margin basis:
With this system, you don’t have to 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 yourself, or you
bear the loss.
Mr. X can buy the 10000USD car with his 1000USD deposit, with the aid of margin basis
trading. When he sells the car for 120000USD, he can take the profit and return the
9000USD to the company who sold him the car with his 1000USD deposit.
However, the company who sells the car to Mr. X for his 1000USD deposit has a
condition.
Its condition is that Mr. X will not possess the car, but the company will hold it for
him.
When Mr. X finds a customer to buy the car, the company will sell it to the
customer, taking the 9000USD, or the remaining price of the car (10000USD), and give
Mr. X 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 while the company holds the goods for you.
You take the whole profit, and you bear the whole loss.
In our example Mr. X paid 1000USD and he is searching for a buyer for the car. Say, he didn’t find a price more than 9000USD for the car.
In this case, Mr. X has made a loss of 1000USD. The Company 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. However, two days later, the price went down even more. The price of the car
now is 8000USD. If Mr. X sold the car at this price, he will lose and the company will
lose too!!
In the trading in margin basis, there’s a goldenrule: The company couldn’t loss!
The company will not wait to the day that the price of the car drops to 8000USD. They
will ask Mr. X to sell the car at the price of 9000USD because any drop in the price means the company will also lose and this cannot happen!
This called a “margin call.” We will talk about it in more detail later!
Now, the most important thing we need 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.
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