Page 58 - Ultimate Guide to Currency Trading

Think of It as a Cash Account

In order to safely navigate the world of currency trading, you must first get the perspective that your
Forex account is actually a cash account. In other words, you should be thinking of your Forex account
as a bucket of money that can be used for trading. If you are always in a trade, your account never
quite gets back to being in full cash.

You must always keep hold of the idea that cash is where you started and cash is where you
will ultimately end. Thinking this way, you will soon get the idea that you will only get into a currency
trade if there is a very good chance of getting out of the trade with your cash intact and, you hope,
with a bit of interest or capital gain to boot.

One of the best ways to think of FX trading is to remember that your account is a cash
account that temporarily goes out of cash and into a currency trade. Your risk appetite can be taken
from this perspective. This will also give you the perspective needed to think of your Forex trading
endeavors in a way that will allow you to build up enough free-cash flow to make withdrawals. These
withdrawals can then be used to pay your bills, etc. Free-cash flow is the amount of money that your
account generates beyond the additions of cash that you have put in. In other words, free-cash flow is
the organic growth of the account. It is the same as the balance in the account minus the amount that
has been deposited by you. This free-cash flow is the ultimate goal of the professional currency trader.

The term free-cash flow is an accounting term that is used in when preparing a cash-
flow statement. Just as in a normal business, you can prepare a cash-flow statement for
your currency trading business. Cash-flow statements comprise the money generated
from operations (trading) minus money expenses, plus money deposited in your

account.

Professional currency traders usually borrow the money that they use to deposit in their
accounts. They might put up a small percentage of their own money, but the majority of the money is
borrowed against other securities in other accounts. If the currency traders have high credit
worthiness and the quality of the collateral is very good, then they will pay a lower interest on the
borrowed monies. If they have a lower credit rating or the quality of the collateral is lower than the
best, the professional currency trader will pay a higher interest rate on the borrowed funds.

These borrowed funds act as the trading capital of the professional Forex trader. If the trader
has the average collateral that includes stocks, bonds, and CDs as her collateral, and her credit rating
is above average, the rate is most likely the same rate as it would be to borrow on margin at a stock
broker's firm. This rate is usually 5 percent to 7 percent more than the prime rate. If the prime rate
(the rate for the bank's best customers) is 3.5 percent, then the professional Forex broker will pay 8.5
percent to 10.5 percent yearly interest on the borrowing of the funds for trading.