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Monday, August 6, 2012

Forex Margin & Margin Call

While Forex brokers allow traders to trade money ten times more than what's been actually invested, brokers always know that traders never lose money beyond their real investments. The warranty here is Margin.

Margin in Forex identifies a requirement for the trading account to have certain amount of real funds on balance as a collateral to cover any possible losses.

In other words, a margin prevents traders from losing virtual money (the money they don't have).
Margin makes sure that while having trading positions open, traders have just enough real money on balance to cover losses if they are to occur. 

Margin requirements vary from broker to broker and depend on the leverage being offered.

Example: Leverage — Margin table

LeverageMargin requirement
20:1 5%
50:1 2%
100:1 1%
200:1 0.5%

So, at 20:1 leverage a trader required to have 5% of the value of each open position in the account intact. This equals to $500 on hold per each lot of 10 000 units. ($10 000 * 5% = $500)

Available margin, Free margin, Usable margin — all are the synonyms used by different Forex brokers — the margin that regulates the allowance for your trading appetite:

A trader can not open a trading position which exceeds his Available margin; and/or keep an old position running if the Available margin is completely drained out, e.g. equals 0.

In case a trader uses the entire Available margin he will no longer be able to open new trades, and should monitor carefully any open trading position that is currently at loss. If the losses continue to accumulate further, there is an immediate risk to get a margin call.

Available margin = 0

Maintenance margin, Required margin, Used margin — also are synonyms, which suggest funds that are in use, currently locked in order to maintain currently open trades.

In other words, a Margin call occurs when due to losses trader's Account Equity (balance + the sum of all floating profit/losses) becomes equal to the Used margin and/or slips a fraction beyond it.

Account Equity <= Used Margin

Margin call simply means that all or a certain part of open trades will be closed in order to prevent further losses beyond the real account balance.

No trader ever wants to receive a margin call and have his/her running trades closed despite own will.
That's why traders try monitoring their account parameters as they trade.  

When a Margin call situation seems to be inevitable, a trader may try to prevent it by either adding more funds to the account, or closing few losing trades at own choice, or change the account leverage to a higher one (with higher leverage Margin requirements will be lowered, but in each case it's a temporary solution to a trouble that has to be solved — a losing trade(s) must be taken care of in a timely manner).

Remember we said earlier that the higher the leverage, the lower the margin? And the lower the margin, the less money is required to keep open trades running safe?

Let's look at the next trading conditions offered by a Forex broker:

Margin Required5%3.3%2.5%2%1%0.5%

If a trader takes the highest leverage of 200:1 the margin is going to be only 0.5%. As a smart trader with a sound knowledge of money management he will never trade inadequately large lots, thus leverage won't hurt him, but he will  benefit from a lower margin requirement by dropping yet another worry of getting a margin call.

That's it. Now you know how to deal with the leverage and margin in Forex:

Take any leverage at your choice and taste, but don't overuse your leverage powers; instead trade lots sizes which in your opinion are appropriate for your account size and your own risk appetite.
Take advantage of a lower margin by increasing your leverage.

There is a final but very important fact every trader should memorize:

If you are ever going to step away from the charts and leave trades open without placing protective stops, take the lowest leverage possible or don't take any at all.

Without a stop order in place the risks of losing an entire account balance or its large part increase dramatically. The consequences of some large economic events may shift prices in Forex market by 500 pips and more in a fairly short  period of time. The chances are, your account won't be prepared to sustain such dramatic shifts and money will be lost. In such cases the only hope to save some capital comes from nowhere else but a margin call...

That is why trading without stops in Forex means being not serious about long prospective of own investment.

Good luck to you all!

1 comment:

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