Dinar Trade v Forex
Forex Trading vs Buying or Selling Iraqi Dinar
While it is true that the Iraqi Dinar is indeed a “foreign currency”, it is not traded, currently at least, in the same way that the regular Forex (foreign exchange) market is traded. You may already have experience with Forex, but even if you do not know what Forex is, this page will help you understand the differences between regular currency trading and the current state of the dinar trading market.
So, why trade the Forex market? The Forex market offers some significant advantages over the more traditional trading markets you may be used to, such as a stock exchange. In this section we will look at some of the unique advantages of the Forex market and also contrast it to buying or selling the Iraqi Dinar. Through the page below, when we talk about the Forex Market we mean the traditional foreign exchange market that excludes the Iraqi Dinar.
Accessibility & Flexibility:
Unlike the other financial markets which are limited to the specific trading hours of the country, the Forex has continuous 24 hour trading, 6 days a week; allowing traders flexibility to choose a time frame to participate that more appropriately fits in with their daily lifestyle. For those of us who hold full-time jobs, it’s not realistic to be “day-trading”. Because of the 24 hour availability of Forex trading, you are able to be “night-trader instead! In contrast, the Iraqi Dinar is not being actively traded on the Forex market. Instead, you will be buying or selling your Dinar with a Dinar currency dealer or engaging in transactions with private Dinar buyers or sellers.
Highly Liquid Market:
The key to success is trading highly liquid markets of any sort. This means you are able to instantly enter and exit markets generally at the price you want. Less liquid markets can be highly volatile and unpredictable in which traders can find entry and exits difficult – especially at the price they want; as well if they were a major share holder who needs to liquidate large holdings. The Forex is the most liquid market available and therefore has great integrity in its prices specifically because, as mentioned earlier, it is virtually impossible for any individual or company to manipulate the market for any length of time. The Iraqi Dinar Trading business is far less liquid. Because there is no dinar exchange market, liquidity suffers. It is best to think of the Dinar currency investment as investing in collectibles, much like coins.
Leverage (Margin Trading):
Most everyone is familiar with the concept of going to your local banker with a 5%-20% deposit and the excitement and anticipation of hoping to obtain a home loan to purchase your very own piece of real estate. After thorough scrutiny and the divulgence of all your financial information they size you up and gauge your ability to meet repayment obligations over a significant period of your lifetime. (Of course, as the great financial credit market bust of 2008 proved, that scrutiny of repayment ability and down payment requirements was severely lacking!).
If you have $50,000 to use as a security deposit for a property, and the bank requires a 10% deposit for the particular type and location of the property which you intend to buy, then the property value can be up to $500,000. (You provide $50,000 and you borrow the remaining $450,000).
This is called LEVERAGING, and a powerful strategy that allows investors to control larger valued assets or money with a smaller amount of capital. You can purchase larger assets and you do not need to fund the entire amount, instead you borrow most and pay interest on that borrowed money. Leveraging is utilised by all wealthy people in and out of the financial markets. It is a great way to fast track your wealth creation, but must be used with extreme caution; the potential for the upside is the same for the down side if you don’t manage and minimise your risk properly. A significant benefit of leverage within the Forex is that the risk is limited, this means you cannot lose more than the balance of your trading account, (which can actually happen with some other trading instruments – some traders of other trading instruments wake up to find they owe more than the money in their trading account – this is absolutely devastating).
Leverage in the Forex market can be lower than 50:1, or as high as 100:1, and even as much as 400:1. This means if you were trading at 100:1 and used $10,000 dollars of your investment capital for a particular trade, then your exposure is a massive $1 million dollars in which you are free to trade the market any way you choose. Earning 1% on $10000 is not that much, but by utilizing leverage you are able to earn 1% on $1 million dollars, for a net investment of $10000. The Forex market offers much higher leverage than stocks or futures. This holds a huge responsibility for traders to know what they are doing and that they are implementing safe risk and money management strategies.
Leveraging your ignorance works just the same as leveraging your knowledge. (Some trading platforms can offer capping to clients leverage to help with the temptation to leverage higher when a trader is not yet ready).
The Forex is also referred to as ‘Margin Trading’ simply because it can only be traded on a margin. The margin (deposit) is the collateral or security deposit for your leveraged position, which is normally a fraction of the total leveraged exposure. However, the amount of money, or margin that you have in your trading account determines the size of the positions you can take. A leverage of 200:1 means you are trading on a 0.5% leverage and you must have 0.5% of the size of that position available as margin within your trading account. (1 divided by 200 equals 0.005 or 0.5%).
Huh? It can seem a little confusing at first, but it will become second nature to you as learn more about Forex trading. The key point to take home is this: You can control far more money in the Forex market than your actual capital (much as when buying a house). How much you can control depends on the leverage given to you by your broker. If you are given 100:1 leverage, that means for every dollar you trade, you control $100 in the market place. However, you should not that leverage can work against you too: when the price moves against you, you need to maintain the leverage ratio by having sufficient capital in your account. Lets walk through an example – I realize you haven’t been exposed to an actual Forex trade yet, but the theory now will help in practice later:
Let’s assume you open a Forex account with $1000 and 100:1 leverage.
You now place a trade to buy EURUSD for a hypothetical cost of $500 (later on we explore the actual costs of trades). You have now spent $500, leaving $500 in your account.
Due to the 100:1 leverage, you now “control” $50000 dollars of currency in the market … for $500!! If the price moves 10% in your favor, the position is now worth $55000. You can sell, repay the $50000 “borrowed” money and net $5000 in your pocket.
So what is the downside? Let’s say that instead of moving up 10%, it moves down 5%, or $2500. That means the position is worth $47,500. Because of your 100:1 leverage ratio, you need to maintain this ratio at all times. In otherwords, you now need to pony up another $25 from your remaining $500 in your trading account, leaving you with $475 in your account. So, as the price moves against you, the money keeps getting taken out of your trading account to maintain the ratio.
What happens when it keeps moving against you and you end up at $0 in your trading account? The broker will automatically close out the position. That means you have lost all your money – but – you cannot lose more than what you funded your account with.
In contrast, the Iraqi Dinar trade typically operates without any leverage at all. This makes it simpler for anyone to get involved. You are buying Dinar based on a negotiated exchange rate, but its a 1 for 1 transaction. There is no leverage in the Dinar trade if you are buying Dinar or Selling Dinar through the typical Dinar dealer network.
Short Trading – Profit from falling prices:
This has to be one of the greatest benefits regardless if you are a Forex, Equities, Futures or Derivatives Trader – short trading allows traders to take advantage of falling prices. Trading the market “short” is just as easy as trading long, (although a little harder in the equities market compared to the other instruments mentioned). Profit is simply made from the fluctuations in price – the difference between the opening price and the closing price, therefore a trader can also profit from falling prices as well as rising prices.
- Trading Long = Profit from rising prices.
- Trading Short = Profit from falling prices.
For example, if a FX trader believed the Euro was to increase against the US Dollar the trader would want to trade the Euro long, so they would BUY into the market. For their position to be profitable the Euro would need to rise. (To close out their position they would need to SELL an equal position; they then they would again be neutral in the market).
However, on the contrary if the trader believed the Euro was going to fall against the US Dollar the trader would want to trade short, so they would SELL into the market. For their position to be profitable the Euro would need to fall. (To close out their position they would need to BUY back an equal position; they then would again be neutral in the market).
When a person has never heard of the concept of short selling most often ‘freak out’ as it is doesn’t fit into the ‘logical’ category – “how can you make a profit when the prices fall?” Short selling is nothing new, in fact traders have been practicing it for hundreds of years. Short selling was howJesseLivermoremade his millions short selling the American market in one of its worst share market crashes in 1929 – he was named the greatest ‘Bear Trader’. Unfortunately we have just been taught from early childhood days that money can only be made when prices rise, and this most likely will result in missing powerful opportunities.
The important part is that you must be on the right side of the market – you must open up your position to profit from the right direction; if you are trading Long you will not profit if the prices are falling, and vice versa, if you are Short you will not profit if the prices rise.
To trade Short all you need to do to open up your position, so you can profit from the falling prices, is to click on the SELL button rather than the BUY button. It seems a little contrary – how can I “sell” something I don’t have. For now, until the concept becomes clear in your head, rename the “buttons” as follows: “Buy” becomes “I think the price is going to up and I want to profit from that” and “Sell” becomes “I think the price is going to go down and I want to profit from that”.
Again, the Dinar trade is far less versatile from this perspective. Because there is no Dinar market exchange, it is hard to place creative trades with the Dinar. Indeed, you are not really actively trading the Dinar. Instead, you are buying Dinar from a dealer. To be able to “short sell” the Dinar, you would need to directly negotiate such a transaction with a dinar dealer, assuming they are open to that.
Many Forex traders like to day-trade the major currencies, as this group regularly have large volatile intra-day movements that traders exploit for exceptional quick profits. Later I will discuss in detail the difference between Day Trading, Intra-Day Trading and Longer Term Momentum Trading, looking at the pros and cons of each. Determining your individual investment style is paramount – something you need to take seriously and not something you are doing for the thrill of it.
The Iraq Dinar is not very volatile. That sounds like a strange statement given the significant drop in value since the war, and the possibility of revaluation, so in that sense, it is volatile. However, on a typical day, the intra-day pricing is fairly static.
Forex offers extremely lower spreads, even against the equities markets. The spread is the difference between the Bid and the Ask. These are two prices quoted by the Forex Dealer and is how they make their money as no commissions or brokerage fees are charged. This will be discussed in more detail in the pages following.
The spread of the Dinar on the other hand is quite high. If you buy the Dinar and then try to immediately turn around and sell the Dinar, you will in effect, immediately lose money. As the Dinar market becomes more liquid, you will see the spread narrow. For the time being, the profit potential in the Dinar is not for short term trading.
Margin Policy & Margin Calls:
The beauty of the Forex market is that the risk is limited and you can never lose more than the money that is in your trading account, so you could never find yourself needing to sell a major asset to fund a large loss. Most brokers have some sort of limit, like 60% of your trading account where they liquidate all your positions should they not be able to contact you. It is important that you research the best on offer at the time you open your account.
There are various margin ratios that differ depending on the trading platform, trading account, even currency pairs. The ratios are quoted 200:1 (which means a 0.05% margin required for the trade), 100:1 (1%), 50:1 (2%) and so on.
Let’s look at a few margin calculations;
Most FX brokers offer a 1% margin policy. Which means traders must always maintain a ratio of 100:1 within their account for their positions to remain open. Otherwise the broker is free to automatically close out all unprofitable trades (some brokers even close out all positions within the account regardless if they are in profit or loss), so ensure you understand what the brokers account Margin Policies are.
This is a good risk management tool which ensures you can never lose more than what is in your trading account, your loss is limited. This means of course if you had $10,000 in your trading account you certainly wouldn’t use up the full $10,000 as your 1% margin to trade positions totalling $1 million, because should the positions go quickly against you they are very likely to be liquidated should they exceed the brokers margin policy limit.
Therefore, your money management needs to identify and factor in average market movements so that your position is not unnecessarily closed out, (or all your positions whether they are in profit or not, which some market makers do, as previously mentioned).
The trading platform you use should have some sort of warning system that alerts you if your account is coming close to a margin call where your position/s will be closed out. It is important to note: in a fast moving market, there may be little time to warn you, or there may not be sufficient time to warn you at all.
It is your responsibility to ensure that you monitor your account and maintain the brokers’ margin policy.
To avoid your positions being closed out it is important that you;
- continuously monitor the status of your account;
- always use a stop loss order so that the risk is limited on your position;
- if you are close to a margin call you can close individual positions to reduce the amount of margin used, or part of your positions if your trading platform allows you to;
- add additional money to your account, but remember the transfer may arrive too late if the market moves quickly against you.
Dinar dealers typically do not offer any form of margin trading. It is a straightforward investment where you choose to buy or sell Dinar at a predetermined exchange rate. Your risk is limited to your entire purchase. As a side note, purchasing the Iraqi Dinar is speculative. We view it as coin collection. There is tremendous upside potential, with many in the industry expecting massive profits to be made. However, it is standard prudent investment advice to only invest that which you can afford to lose. Never invest your retirement savings. Use only discretionary income. At www.dinarnow.com we like to build up long term relationships and while we are unable to give financial advice, we, as a matter of blanket policy, suggest investing only that which you could afford to lose.