A margin calculator is a means by which the transactional value, margin equivalent, Forex margin, margin based leverage, etc is determined. Basically, a margin calculator provides investors and traders with facts and figures relative to a margin account. Of course, before one can actually go about performing calculations the investor and/or broker must be familiar with basic terms, definitions, techniques, etc. relative to Forex and margins. This article will discuss just that, keeping in mind beginners or average traders.
Leverage
In a nutshell, it is the use of specific tools in order to move from one position to a more favorable one. In Forex, especially when discussing margin calculators it means the use of assets such as currency or property as a collateral with the broker or trading house under an agreement similar to a short-term loan. The basis of the “loanable amount” depends on the cash equivalent of the currency or property used as collateral.
Currency Pair
Simply put; 2 different currencies. The values of which, refer to – and are compared with each other. This is more commonly known as the exchange rate. The first currency is known as the “base” while the second currency is the “quote” For example the currency pair of United States Dollars to Euro’s as a currency pair. This means the base is $1 and the Quote is Euro 0.815660685. The example shows the amount of quote currency needed to purchase one unit of base currency.
PIPs
Percentage in points (PIP/Pips) refers to the smallest unit of price change in a given transaction. In Forex margin, trading this usually means 1/100 or 1% but it can be higher or lower depending on the currency pair.
Lot
In its most general sense, a lot is a group of items, goods, and/or services that can make up a single transaction or a series in pursuance of a specific set. A lot, when used together with a Forex margin calculator means a standardized quantity and/or quality of financial instruments. This standard is set up and/or regulated by the proper regulatory agency and must comply with national or local legislation referring to the same.
Short
A Short position or “short” means borrowed security is sold because it is expected that the value of the same will drop. For example, Mr. A directs his Trader 1 (broker) to use a percentage of his margin, which is in United States Dollars and buy up Euro’s under the expectation that the same will increase in value relative to the US dollar. After several trading days, the opposite occurred and the value of Euro is on the decline. Mr. A then directs his broker to sell, even at a loss in order to minimize the same. In this example, the selling position of Trader 1 is a short position in this case.
Long
The opposite of a short position in that the trade is made with the expectation of profits.
Stop
This means an order to discontinue buying or selling. This can be done in order to solidify gains, maintain the status quo, or minimize losses.