In the previous lesson, we went through the introduction of margin trading. In margin accounts, there is quite a lot of jargon involved. So, starting from this lesson, we shall discuss all about it.
To begin trading in the forex market, you must open an account with an online retail forex broker.
Once the account gets verified, you can start taking positions. But wait, you can’t take a position for free. You must deposit some money into your margin account to actually start trading.
So, the amount you deposit initially becomes your account balance or simply “Balance.” Basically, it is the amount of cash in your account. For example, if you deposit $500 in your account, then this $500 becomes the balance with which you can take trades.
Many would be under the assumption that once they open a new position, the money is debited from the balance. However, this is totally incorrect.
In reality, when you open a new position, your account balance is not affected until you close that position.
When does the Balance change in an account?
There are three by which the account balance can change:
- When funds are added in the account.
- When a position is closed.
- When a position is kept overnight, money from the balance is either deducted or received as swap/rollover fee.
The concept of rollover
Though we’re concerned about the lingos in margin trading, let us take it a little off-topic and understand what rollover in trading is, as it affects the balance of an account.
In simple terms, rollover is the process of moving the open positions from one trading day to another.
In this process, brokers automatically close the open positions at the end of the day and simultaneously open a new identical position for the following trading day. This whole process is referred to as “rollover.”
Note that, a rollover does not happen free of cost. There is a fee that is either paid or charged to the account holder at the end of the day if there are any positions running overnight. And, this fee is called the “swap.”
Swap is the fee which is determined by the units of currency traded and the interest rates on the currency. There is more it as well, but, it shall be discussed in the later part of the course.
For now, all you need to know is:
If you are PAID swap, then money will be added to your account balance.
Conversely, if you are CHARGED swap, then money will be deducted from your account balance.
Hence, this completes the lesson about balance in a margin account. In the next lesson, we will discuss UnrealizedP/L, RealizedP/L and its effects on the account balance.
Until then, test your understanding of this lesson by taking up the quiz below.