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The amount of cash that Interbank FX requires a customer to deposit or maintain in the Customer's Account in connection with the Customer's trading activity. The initial margin requirement for Interbank FX traders is 2% for mini and standard accounts. The system performs an automatic pre-deal check for margin availability, and will only execute trades if the client has sufficient margin funds in his or her account. An account with Interbank FX will receive a Margin Call Warning when the margin required for positions becomes equal to or greater than the account's equity value. A Margin Call Warning is intended to be a signal to customers that if positions are not manually closed, or if funds are not added to the account, the customer will be in risk of having open positions automatically liquidated (i.e. a Margin Call Liquidation). Interbank FX executes Margin Call Liquidations, in an effort to protect both the company and the customer, if the customer's account equity value falls to a level of 100% of the required margin. This is an important risk management strategy for both Interbank FX and our clients.

In trading parlance, a long position is one in which a trader buys a currency at one price and aims to sell it later at a higher price. In this scenario, the investor benefits from a rising market. A short position is one in which the trader sells a currency in anticipation that it will depreciate. In this scenario, the investor benefits from a declining market. However, it is important to remember that every FX position requires an investor to go long in one currency and short the other.

The most common risk management tools in FX trading are the limit order and the stop loss order. A limit order places restriction on the maximum price to be paid or the minimum price to be received when entering a position. A stop loss order is placed to close a position when a pre-determined price is reached. It is important to note that stop loss orders do not guarantee a particular closing price. The price specified in a stop loss order is merely a trigger point; if this price is met or exceeded the broker is instructed to close the position at market price. Stop loss orders attempt to limit potential losses should the market move against a trader's position.

Currency traders make decisions using both technical factors and economic fundamentals. Technical traders use charts, trend lines, support and resistance levels, and numerous patterns and mathematical analyses to identify trading opportunities. Fundamentalists on the other hand, predict price movements by interpreting a wide variety of economic information, including news, government-issued indicators and reports, and even rumor. The most dramatic price movements however, occur when unexpected events happen. The event can range from a Central Bank raising domestic interest rates to the outcome of a political election or even an act of war. Nonetheless, more often it is the expectation of an event that drives the market rather than the event itself.

Market conditions dictate trading activity on any given day. As a reference, the average small to medium trader might trade as often as 10 times a day.

As a general rule, a position is kept open until one of the following occurs: 1) realization of sufficient profits from a position; 2) the specified stop-loss is triggered; 3) another position that has a better potential appears and additional margin is needed. There are essentially two categories of traders in the FX market, the ‘swing trader' and the ‘day trader'. Swing traders are those who tend to hold long term positions and who are looking to slowing realize profits, perhaps over days, weeks, or even months. Day traders are just the opposite and are those who prefer to open and close a position in a 24 hour period or less. Often, day traders hold positions for as little as a few minutes.

Typically the standard minimum transaction size in the FX market is 1 lot, or 100,000 of the base currency, with a minimum margin deposit of 2%. For example, a US $100,000 position would require an initial margin deposit of US $2,000. Interbank FX also offers the option of trading 'micro lots', lot sizes that can be as small as .01 or 1% of either a standard or mini lot.

Forex and commodity trading is always conducted on 'margin'. This means that a cash deposit, usually much smaller than the underlying value of the currency or commodity contract, is required in order to trade. For example, a broker might require only $2,000 in the trader's account in order to trade a $100,000 currency position. The $2,000 is referred to as 'margin'. This amount is essentially collateral to cover any losses that you might incur. Since nothing is actually being purchased or sold for delivery, the only requirement, and indeed the only real purpose for having funds in your account, is for sufficient margin.

Margin should reflect some rational assessment of potential risk in a position. For example, if a currency is very volatile, a higher margin requirement would normally be justified. One common rule of thumb is a worst-case one day move in the market. So if a $100,000 currency position is unlikely to move by more than 1% (or $2,000) in a 24 hour period, a $2,000 margin requirement is probably reasonable. If, however, the currency or commodity in question is highly volatile and is likely to move by, say, $3,000 or more (or 3%, as is often the case with certain NASDAQ stocks and some commodities) it would put the broker at increased credit risk to require only a $2,000 margin deposit. Note that margin available in your trading account is based on account equity, not account balance. The equity is the most accurate measure of the value of your account, as it takes into account unrealized gains or losses.

A pip is the fourth digit in the value of a currency pair, except in Japanese Yen crosses where a pip is the second digit. In EUR/USD, a movement from 1.00660 to 1.00670 is one pip, so a pip is .00010. In USD/JPY, a movement from 120.450 to 120.460 is one pip, so a pip is .010. How much in dollars is this movement worth, for example, per 100,000 Euros in EUR/USD? How much is one pip worth per 100,000 Dollars in USD/JPY? We will refer to the size, in this case 100,000 units of the base currency, as the 'Notional Amount'. The formula for calculating a pip value is therefore: (one pip, with proper decimal placement/currency exchange rate) x (Notional Amount). Using USD/JPY as an example, this yields: (.010/120.460) x USD100,000 = $8.30 or $8.30 cents per pip. Using EUR/USD as an example, we have: (.00010/1.00660) x EUR 100,000 = EUR 9.93. But we want the pip value in USD, so we then must multiply EUR 9.93 x (EUR/USD exchange rate): EUR 9.93 x 1.00660 = $10.00. This is in fact a phenomenon you will see with any currency in which the currency is quoted first (such as EUR/USD, GBP/USD, or AUD/USD): the pip value is always $10.00 per 100,000 currency units. This is why pip (or 'tick') values in currency futures, where the currency is quoted first, are always fixed.

Seem a bit too complicated? Check out our easy-to-use pip calculator and let it do the work for you.