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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.
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. |
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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.
Managing a Margin Account
Trading on margin can be a profitable investment strategy,
but it is important that you take the time to understand
the risks.
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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.
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The positions in your account could partially or
totally be liquidated should the available margin
in your account fall below a predetermined threshold.
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You may not receive a margin call before your positions
are liquidated.
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You should monitor your margin balance on a regular
basis and utilize stop-loss orders on every open
position to limit your risk.
Margin
The
maximum available margin is 0.25% (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.
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.
*
Without proper risk management, this high degree of
leverage can lead to large losses as well as gains
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