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 400:1* or .25%, the initial margin deposit for
this trade is $250.00.
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.
-
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.
-
The positions in an account could be partially or totally liquidated
should the available margin in the margin trading account falls
below a predetermined threshold.
-
One may not receive a margin call before their positions are
liquidated.
-
One should monitor their 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 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 400 leverage*,
simply divide the deal size by the leverage amount e.g. (400,000
/ 400 =1,000). One posts $1,000 margin for this trade, leaving a
$4,000 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.
*
Changing Leverage magnifies both losses and gains.
