By Fabiano Trevisiol
Basic of forex – Rollover – Swap – spread – take profit – stop loss
In this article we consider teaching some basic concepts related to forex trading, online trading course in currency markets.
We also answer some of the most common questions.
Spread Take Profit e Stop Loss
What is the spread
The spread is the price we pay to the broker for his service every time we enter the market, is nothing more than a certain number of pips of difference in our disfavour compared to the price at which we perform the ortder. Whenever we enter the market the position will open automatically with a negativity in pips the spread, then in the immediate insertion of the order we will immediately reversed and before you start earning you should retrieve the loss by the spread, wich is the price that the broker makes us pay for his service.
Always respect the spreads, on the platform are visible 2 prices for each currency pair. The BID and the ASK. The BID is the price quotation if you sell, ASK if you buy. The difference between these 2 quotes is represented by the spread on EUR/USD cross, usually no more than 3 pips.
What is take profit and stop loss
When we enter an order in the market, we can tell the broker what price level take our profit and at what price level close the position at a loss. These 2 price levels are called “take profit” and “stop loss” and are both optional.
How take profit and stop loss are affected from the spread
If you’re buying a currency at the time when the position closes it as if were a sale, so the price where take profit will be the BID.
If you’re selling one currency, at the time when the position closes will be like if we were to a purchase, so the take profit will be executed at the ASK. price
For the stop loss is the same reasoning backwards.
If we want to be certain that a long position, buying, closes exactly at 1.2950 price value we should place the take profit slightly below — to 1.2950-spread.
Then for a spread of 2 pips, you will:
1,2950-2 pips (0,0002) = 1,2948.
Because the price of take profit execution will be the BID that is higher than the price of 2 pips, then to close exactly at 1.2950 rounds we should remove this difference.
The general rule are:
When we are LONG, we buy, the stop loss or take profit will be executed at the BID price
When we are SHORT, we sell, the stop loss or take profit will be executed at the ASK price
Rollover and Swap on trading online
What is rollover? What is swap?
To fully understand what it is you need to start by explaining what happens in practice when we make trading forex?
Quando facciamo trading online forex, ad esempio euro dollaro (eur/usd) e per esempio apriamo una posizione buy, stiamo semplicemente comprando euro e vendendo dollari.
Each currency has an interest rate applied to its owner, decided by the Central Bank. For example, to the euro at the moment the official rate is 0.75% per annum, while the dollar is of 0.25% per annum. Buying a currency you are entitled to receive this rate of interest, because in that moment you have, selling it, on the contrary, we will pay this rate . Buying euros and selling dollars, the broker it will credit or charge you the difference between the 2 interest rates, this usually takes place at the end of each session, which is normally at 23.00 Italian, the 5:0 pm local time in new york. The difference between 0.75 and 0.25 is 0.5, therefore to logoff there will be credited an interest of 0.5% on an annual basis to the amount with which we are in the market at that time, on the contrary if we are selling euros and buying dollars, this amount will be charged.
This is called debit/credit or rollover swaps, which are synonyms of the same type of phenomenon that occurs by operating in the forex markets of currencies.
Why in some cases my broker does not rispect this reasoning?
First of all, the broker does not take the capital for open positions directly from central banks, but intermediaries named liquidity provider or providers of liquidity. These topics may apply interest rates other than those of central banks therefore the rollover or spread may be different. The broker also held a part of rollover for himself, so if the rollover is negative, we will charge a bit more if it is positive, slightly decreased, and the difference is for the broker that a the end walks away. It is in addition to spread one of the ways that the broker earn.
The rollover is particularly important when the differential between interest rates of two currencies is high, for example on AUD/USD is 3.25% differential. So by selling dollars and buying Australian dollars (then entering buy on aud/usd) the rollover is pretty positive. The Act of work trying to get support or rollover swaps and gaining from it is called carry trade. By trading in carry trade means open a position that there will be a rollover rate positive at the end of each session and offset losses due to negative positions thanks to this gain, which although small is guaranteed and especially on long term or with large capital is sensitive, hence also explained the definition of carry trade.
What are islamic accounts?
Those who practice the religion of Islam cannot receive or pay interest because this culture is sin. So to attract even customers who practice the religion of Islam many brokers offer the so-called Islamic accounts, accounts where rollovers or swaps are not applied.
I hope with this in-depth lesson of giving all important information to perform profitably a happy successful trading!
Good trading everyone, until the next lesson!