At the moment, we have found that the margin trading involves the use of borrowed capital - the trader takes money to make transactions in the Forex with your Internet broker. To understand the material in this chapter, we need to examine the principle of circulation of money in the state.Imagine that formed the new state. There are working-age population, but the money in the state yet - what to do? The Central Bank of the State entrusts our virtual house print Mint series banknotes standard pattern. Assume that the banknotes are printed, but as we now distribute them to the public? In the state there is a number of commercial banks, which take a loan from the Central Bank (arrange the loan). Credit, as we know, does not come just like that, for it is necessary to pay interest. This - the key moment of the formation of monetary policy. The central bank sets the interest rate at which loans to commercial banks. In different countries, this rate is called differently. In Russia it is called the refinancing rate(the interest rate). In foreign literature, it can be called interest rate The, base rate The, key bank rate The etc. Back to our virtual state - now commercial banks have money, and they, in turn, begin to lend to organizations under a higher percentage than the refinancing rate. Thus, commercial banks earn a profit on the difference in interest rates on loans. Organization is establishing the business, hire employees who are paid wages. As a result, business processes in organizations are goods (or services rendered). Profit organizations and commercial banks to return the borrowed money and interest. Commercial banks, in turn, pay on loans from the Central Bank. As a result, the money distributed by the state. Of course, this is a very simplified scheme, but her understanding is very important for the study of Forex trading borrowed capital.
The interest rate in the country - one of the main levers of control inflation. Inflation is the increase in the number of cash in circulation. In other words, the banknotes in circulation becomes larger, they can buy more. In this situation, organizations are trying to raise the price of goods and services, resulting in depreciated money. To slow the rise in inflation is necessary to reduce the amount of cash in circulation. To this end, the state increases the interest rate. The point interest rate increase in order to reduce inflation, at first glance, is not obvious, and to understand it is just necessary to know the basis for the formation of the money in the state. The higher the interest rate, the more commercial banks are forced to raise rates on loans granted to organizations. Therefore, the organization is less than borrow, production collapses, the salary is paid on a smaller scale, and therefore the amount of cash in circulation decreased. As a side effect of such "interference", due to lower production in the state increased the unemployment rate. This example shows that in the state of all the processes are interrelated, and often have to sacrifice one for the other.
What is the meaning of all this for the Internet trader? Consider an example where we are going to buy US dollars for Japanese yen at the quotation USD / JPY. In Internet broker, we have opened the account at 1 000 US dollars. We have already said that the principle of margin trading allows us to buy dollars for yen, even if we do not have Ian. But it is important to understand that the Jena is not taken from the air - the Yen, we take a loan from the online broker! They buy dollars (Internet broker buys them on our behalf). And another very important point - bought dollars remain with the Internet broker, we do not dispose of. The only thing we can do with them - it is to sell them back for Jena, ie close the position at a profit or a loss. So the dollars are purchased from Internet broker. In other words, they we give a loanonline broker.
We have already learned that if we take the money in the debt (taking credit), we must pay the appropriate credit rate. Since all transactions are carried out in the interbank forex level used is the same interest rate of the Central Bank. And if we took a loan US dollars, then pay the interest rate established by the US central bank (Federal Reserve Bank). If we took the Japanese Yen loan, then pay an interest rate set by the Central Bank of Japan (Bank of Japan). Different countries have different interest rates, which we'll talk.
The interest rate expressed as a percentage per annum (%). In Japan, at the time of writing this chapter, it is set to 0.5%, while in the US it is equal to 3.0%. So for borrowed from Internet broker Japanese Yen, we pay 0.5% per annum of the amount of the loans. But the Internet broker of commitments in our US dollar debt pays 3.0% per annum. Note that this rule applies only if our open long position on USD / JPY quotation is not closed for several days. That is, interest is calculated daily on the open positions! If we close the position on the same day that it opened, the interest rates in the calculations are not used. Suppose that our position has been open for a month, and at the end of the month, we decided to close it. For simplicity, assume that the buying rate is equal to the rate of sale, that is the course of the quotation USD / JPY almost unchanged in the past month. On the exchange rate difference, we did not earn. But what about credit? We need to pay Internet broker 0.5% per annum for one month, which is about 0.5% / 12 = 0.04% of the amount taken. We have to pay this amount in yen, but the calculations are converted into the currency of our account, in this case in US dollars at the exchange rate of dollar sales quotation in USD / JPY. Online broker should pay us 3.0% per annum for one month, that is 3.0% / 12 = 0.25% of the amount taken in dollars. It is understood that the amount taken, which we must in yen, and the amount you owe us in dollars, equivalent to the size of the open position, ie, the size of the lot, mini lot or micro lot, depending on what size we use a lot. Assume the position was open one mini-lot (one mini lot is equivalent to US $ 10 000). Then, in our example, we will earn on the difference in interest rates of 0.25% - 0.04% = 0.21% of the size of small lots, ie about 10 000 * 0.0021 = 21 USD.
Note that if we opened a short position on the US dollar (selling US dollars for Japanese yen), the result would not have earned and lost 21 US dollar on the difference in interest rates. Do you earn or lose on the difference in interest rates independent of the traded currency and type of open position (long or short). The amount payable at the interest rate called bank interest (interest). In margin trading bank interest is always to earn a currency that is bought and is always paid on the currency for which buying.
As we have just seen, the profit on Forex can earn not only on change of exchange rates, but also on the difference in interest rates around the world. Kind of Forex trading, which involves trading on the difference in interest rates is called carry trading. Not all online brokers pay the bank interest - there are those who only earn a rate of interest, but never on it do not pay. Some online brokers current interest rates might differ from the Central Bank of the countries of the world, and can also change over time. Therefore, consult your Internet broker on the interest payments to the bank on interest rates before it has to start a real account! Opening the position you should clearly understand the components of your income and your expenses, so as not to open clearly losing position or close it at a loss. It is important to understand that the interest of the bank can be a part of your income and your expenses component. In the latter case it is necessary to close a position as to not only block the spread, but block the costs bank interest.
The concept of banking interest and the interest rate can confuse the novice Internet trader, so if you do not want initially to deal with these concepts, just do not leave your position open through the night (overnight). Use only the strategy day trading (day trading). If the position is opened and closed in one day, the bank interest on it is not calculated. About trading strategies will be discussed in detail in the section of the University of Forex.
We have said that on weekends and public holidays active trading on the Forex is not conducted. Therefore, bank interest may be calculated unevenly throughout the week. That is, at the weekend it is not calculated, and the corresponding share of the weekly bank interest allocated to the week. Considering that in the 7 days, we can have a situation where on Monday, Tuesday, Thursday and Friday, accounting for 1/7 of the weekly bank interest, and on the environment has to 3/7. As a rule, Internet brokers publish a table that indicates the distribution of bank interest on the day of the week. We emphasize once again that the bank interest is calculated on a daily basis!
Below is a table which shows the interest rates around the world, operating in March 2008, in order to reduce the share of trading on the Forex respective currency. The table also shows the name of the central banks of the world, and links to their pages on the Internet.
As the table shows, in Japan with the lowest interest rate (0.5%), which makes Japanese Yen (JPY) is very attractive for carry trading Forex. It is worth noting that, according to Singapore's monetary policy, the interest rate on the Singapore Dollar (SGD) is not fixed by the Central Bank, as determined by trading on the foreign exchange market, ie constantly changing. Also be aware that from time to time in the country to increase or decrease the value of the interest rate to correct the economic situation in the country. Therefore, you should follow the news of the world economy, to react to changes caused by the release of economic indicators (of fundamental analysis will be discussed in the section School of forex).