Trading currencies on margin lets you increase your buying power. Here's a simplified example: If you have $5,000 cash in a margin account that allows 200:1 leverage*, you could purchase up to $1,000,000 worth of currency-because you only have to post 0.50% of the purchase price as collateral. Another way of saying this is that you have $1,000,000 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.
200 Leverage Margin 0.50%
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 1.63221/1.63271 (meaning you can buy $1 USD for 1.63271 CHF or sell $1 USD for 1.63221 CHF. You buy dollars (sell Francs), buying 100,000 units: $100,000 USD and sell 163,271 CHF. With your leverage* at 200:1 or .50%, your initial margin deposit for this trade is $500.00, leaving your account balance at $4,500.
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.
- 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.
- The positions in your account could partially or totally be liquidated should the available margin in your account fall below a predetermined threshold.
- You may not receive a margin call before your positions are liquidated.
- You should monitor your margin balance on a regular basis and utilize stop-loss orders on every open position to limit your risk.
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 for the trade.
Margin = (Contract size / Leverage*)
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.
You have $5,000 in an account. To calculate the margin required to execute 4 standard lots of USD/JPY (400,000 Units) at 200:1 leverage, simply divide the deal size by the leverage amount e.g. (400,000 / 200 =2000). You post $2000 margin for this trade, leaving a $3,00 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.