Profit and Loss (P&L) - margin balances and liquidations
By profit and loss traders measure both success and failure. As a support to the margin requirements that are established by a broker, cash is needed when opening an online currency trading account. The initial deposit is the margin balance and it is the base for collateralization of any future trades. Brokers establish ratios of margin balances so that open positions are maintained at all times.
An extreme caution is required when establishing margin needs and liquidation policies with the broker as those requirements may vary depending on account sizes and trading lot sizes. The details are always in fine print in the opening contract.
Mark-to-market calculation is commonly offered by online brokers and it shows unrealized P&L based on where open positions in the market are closed at a given moment. It is alo worth remembering that the margin balance is the sum of the initial margin deposit, unrealized P&L and realized P&L.
Realized P&L is what happens when one closes out either a trade position or a portion of it.
There is a constant change involved in the forex trading as prices and both realized and unrealized P&Ls change all the time.
In terms of mathematic, P&L calculations are rather straightforward as they are all baesd on the number of the made and lost pips. A pip (point) is the smallest increment of price fluctuation in currency prices. This can be easily expalined on the example of a currency pair as most of them are quoted using five digits. The pip is the last digit in a given pair. Although they provide an easy way to calculate the P&L, pips also are being updated as a result of constantly advancing elecronic trade. The electronic forex platforms calculate the pip automatically but only after one has entered online trade, whereas it would be perfect to do that before the entering.
It is critical to maintain the balance and stay in control of trading as it helps prevent one from costly mistakes.
Rollover
There is one unique market convention associated with currencies only - rollovers. Rollover is a transaction where an open position from one value (settlement) date is rolled over into the next value date. Rollover rates are based on two different interest rates of the two currencies in a traded pair. This difference is called the interest-rate differential. The larger it is, the larger the impact form rollovers.
Rollovers are usually applied automatically to open positions after the 5 p.m. They are not applied if there is no position over the change in value date (being square at the end of trading day). They can be either profitable or costly, depending on whether one is long or short the currency.
Some online brokers display bid and offer prices differently (e.g the bid on the bottom, the offer on top). The bid price is the price of sale the base currency; the offer price is the price of purchase the base currency. The difference between these two prices is a spread. Spreads vary between brokers and by currency pairs. The more liquid the currency pair, the narrower the spread.