Understanding
Margin 
Trading currencies on margin lets
you increase your buying power. Here's a simplified example: If you
have $2,000 cash in a margin account that allows 400:1 leverage, you
could purchase up to $800,000 worth of currency-because you only have
to post 0.25% of the purchase price as collateral. Another way of
saying this is that you have $800,000 in buying power. Leverage*
is a
double-edged sword. Without proper risk management, this high degree of
leverage*
can lead to large losses as well as gains.
Benefits of
Margin
With more buying power, you can
increase your total return on investment with less cash outlay. Trading
on margin should be used wisely as it magnifies both your profits AND
your losses.
Margin Benefits Example:
You have a $5,000 account
balance; you decide that the US Dollar (USD) is undervalued against the
Swiss Franc (CHF).
The current bid/ask price for
USD/CHF is 1.6322/1.6327 (meaning you can buy $1 USD for 1.6327 CHF or
sell $1 USD for 1.6322 CHF. You buy dollars (sell Francs), buying 1
lot: $100,000 USD and sell 163,270 CHF
With your leverage*
at 400:1 or
.25%, your initial margin deposit for this trade is $250.00, leaving
your account balance at $4,750.
As anticipated, USD/CHF rises to
1.6435/1.6440. To close out the position you sell 1 lot, $100,000 and
buy 164,350 CHF.
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Initial sell
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163,27 CHF
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Offset buy
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164,35 CHF
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Profit/Loss
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1,080 CHF
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USD Equivalent
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$657.10
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Return on Investment (ROI)
for this trade would be calculated as follows:
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Initial Investment
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$250.00
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USD Profit
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$657.10
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ROI
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262.80%
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Managing
a Margin Account
Trading on margin can be a
profitable investment strategy, but it's important that you take the
time to understand the risks.
- You should make sure you
fully understand how your margin account works. Be sure to read the
margin agreement between you and the clearing firm. Talk to your
account representative if you have any questions.
- The positions in your
account could be partially or totally liquidated should the available
margin in your account fall below a predetermined threshold.
- You may not receive a
margin call before your positions are liquidated.
You should monitor your
margin balance on a regular basis and utilize stop-loss orders on every
open position to limit downside risk.
Margin
The maximum available
margin is .25% (400:1 leverage*),
although some FCMs still only offer a
maximum of 1% (100:1 leverage*).
Traders always have the option of
employing a lower degree of leverage*.
Keep in mind that the lower the
leverage used requires a larger amount of margin capital for the trade.
Without proper risk management, this high degree of leverage can lead
to large losses as well as gains.
Margin =
(Contract size / Leverage)
The minimum margin
requirement is approximately $250 per lot in a mini $100,000 account.
The requirements for leverage*
may vary with account size or market
conditions, and may be changed from time to time at the sole discretion
of the FCM. Margin requirements may vary from .25% to .5% during heavy
trading hours of start of London session until the close of the New
York session and range up to 2% during light trading hours or
off-trading hours.
If maximum leverage*
is
employed, traders must maintain the minimum margin requirement on their
open positions at all times. It is the customer's responsibility to
monitor his/her margin account balance. FCMs have the right to
liquidate any or all open positions whenever a trader's minimum margin
requirement is not maintained. This is an important risk management
feature designed to strictly limit trading losses in your account.
Margin
Example:
You have $5,000
in a mini account. To calculate the margin required to execute 4
standard lots of USD/JPY (400,000 USD) at 400 leverage*,
simply divide
the deal size by the leverage*
amount e.g. (400,000 / 400 =1,000). You
post $1,000 margin for this trade, leaving a $4,000 balance in your
account.
The trading platform
automatically calculates margin requirements and checks available funds
before allowing you to successfully enter a new position. If you do not
have adequate funds available to enter a new position, you will usually
receive an "insufficient margin funds" message when attempting to deal.
If the unrealized
P&L of your net total open position falls below your account
balance, your account is under margined and all your open positions may
be liquidated. To avoid liquidation of your
positions, do not use your entire account balance as margin for open
positions. Instead, leave enough funds in
your account to withstand a market movement against your open positions.We
suggest you always use stop loss orders to limit your downside risk.
Please contact either Trading Intl or your FCM if
you wish at any time to use a lower degree of leverage*
or adjust the
margin settings of your account.
**Disclaimer: Forex
trading involves a substantial risk of loss.
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