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UNDERSTANDING
MARGIN
Trading
currencies on margin allows one to increase their buying power.
Here's a simplified example: If one has $2,000 cash in a margin
trading account that allows 400:1 leverage*, one could purchase
up to $800,000 worth of currency- as one would only have to
post 0.25% of the purchase price as collateral. Another way
of saying this is that one has $800,000 in buying power.
Benefits of Margin
Trading on margin should be used wisely as it magnifies both
losses and gains.
Example:
If one has a $5,000 account balance; and decides 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
one can buy $1 USD for 1.6327 CHF or sell $1 USD for 1.6322
CHF. One buys dollars (sell Francs), buying 1 lot: $100,000
USD and sell 163,270 CHF. With leverage* at 200:1 or .50%,
the initial margin deposit for this trade is $500.00.
Managing
a Margin Account
Trading on margin can be a wise investment strategy, but it
is important that one should take the time to understand the
risks.
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One should make sure to fully understand how margin account
works. Be sure to read the margin agreement between you
and the clearing firm. Talk to the account representative
if one has any questions.
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The positions in your account could partially or totally
be liquidated should the available margin in the margin
trading account falls below a predetermined threshold.
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One may not receive a margin call before their positions
are liquidated.
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One should monitor their margin balance on a regular basis
and utilize stop-loss orders on every open position to
limit risk.
Margin
The
maximum available margin is 0.50% (200:1 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 to trade.
Margin = (Contract size / Leverage*)
The minimum margin requirement is approximately $250 per lot
on a 100K contract size. 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.
Margin Example:
If one has $5,000 in a mini account. To calculate the margin
required to execute 4 standard lots of USD/JPY (400,000 USD)
at 200 leverage*, simply divide the deal size by the leverage*
amount e.g. (400,000 / 200 = 2,000). One posts $2,000 margin
for this trade, leaving a $3,000 balance in the margin trading
account.
The trading platform automatically calculates margin requirements
and checks available funds before allowing one to successfully
enter a new position. If one does not have adequate funds
available to enter a new position, they will usually receive
an "insufficient margin funds" message when attempting
to deal.
If the unrealized P&L of the net total open position falls
below the margin trading account balance, the account is under
margined and all open positions may be liquidated. To avoid
liquidation of the positions, one should not use the entire
account balance as margin for open positions. Instead, leave
enough funds in the account to withstand a market movement
against the open positions.
*
Without proper risk management, this high degree of leverage
can lead to large losses as well as gains
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