FOREX MARGIN TRADING

Forex margin trading is playing main role in forex trading study and learning. As a beginning we should know what is margin?

When a private investor who purchases, let’s say: GBP/USD have to put down a deposit known as ”margin”, this is required rule. Also the sale of one currency involves the purchase of another, the seller of GBP/USD will have bought a volume of USD and will also have to put down margin.

What percent could it be? The normal margin requirement is between 1% and 5% of the underlying value of the trade. Here is an example: If your margin requirement is 2.5% of the 5,000 USD in your margin account, you can open a positions worth 200,000 USD. You may be asked to provide additional funds, when the funds in your margin account drop below the minimum required to support your open positions. This is well known as a ”margin call”.
Margin is really required equity, when it comes to collateralize a position.

The meaning of trading on margin is the ability to buy and sell assets, which represent more value than the capital in your account. Just to give an example: a margin of 2.0% means that you can trade up to $500,000 even though you only have $10,000 in your account. Forex trading is usually done with relatively little margin since currency exchange rate fluctuations tend to be less than one or two percent on any given day.

Here it is: $10,000 is 2.0% of $500.000, or put it another way: 50 times $10,000 is $500,000, because in terms of leverage this corresponds to 50:1. You can make profits very quickly thanks to the possibility of using this much leverage, but there is also a greater risk of incurring large losses and even being completely wiped out. Maximize your leveraging it’s inadvisable, because the risk can be very high. Attracting investors to the FOREX market who wish to risk less than one million dollars at any time (a standard lot for trading on the exchange market), it employs what is referred to as a margin trade.

”Forex Margin trading” was created in 1985 for purposes of potentially advantageous trades of currency. The process involves a cash deposit, which is usually much smaller as an amount than the commodity contract or underlying value of the currency, that is required because of the affecting the trade. The main distinction the financial marketsfrom FOREX trading system, is s that foreign currency purchase-sale operations can be processed and made without having a set required sum to perform trading operations. The client needs to invest only a small start up amount, that is referred to as a ”margin” in order to manage a purchase.

The so-called ”shoulder” or leverage gives the client an opportunity to make deals in volumes that are 50-100 times greater the start up amount. It is granted by a credit institution bank or bank, where he deposits a guaranteed margin. Just a simple example: by depositing a guaranteed amount of $100,000 in a broker company or bank, the individual can make financial operations in amounts of 5 to 10’s of millions of dollars. Any kind of modest gain on the FOREX Market is considered to be of significant size. If we think of another advantage of FOREX, this could be the profit derived from any direction of price changing, regardless of the particular currency involved.

Here are some really important terms connected with the margin:

The margin ( Initial ) is paid by both forex traders: the seller and buyer, representing the losses on that contract, as determined by historical price changes, that is not likely to be exceeded on a usual day’s forex trading.

Because a series of adverse price changes may exhaust the initial margin, a further margin, usually called variation or maintenance margin, is required by the forex exchange. Calculated by the futures contract, i.e. agreeing a price at the end of each single day, also called the “settlement” or mark-to-market price of the contract.

Speculators use the term - margin-equity ratio, which is the amount of their trading capital, used to hold it as margin at any particular time. Forex trader would rarely hold 100% of their capital as margin, that is also unadvisedly strategy. The options to lose their entire capital at some point could be high. A conservative trader might hold a margin-equity ratio of 15%, while a more aggressive trader might hold 40%. By contrast, if the margin-equity ratio is so low as to make the trader’s capital equal to the value of the futures contract itself, then they would not profit from the inherent leverage implicit in futures trading.. Return on margin (ROM) is often used to judge performance because it represents the gain or loss compared to the exchange’s perceived risk as reflected in required margin. ROM may be calculated (realized return) / (initial margin). The Annualized ROM is equal to (ROM+1)(year/trade_duration)-1. For example if a trader earns 10% on margin in two months, that would be about 77% annualized.