Tips for Margin Trading

Margin Trading the Simple Method

Margin trading is simple as forex trading account that is 'leveraged'. This means that on every trade of $1 you have up to invest $100. A typical account designed in such a way, that you have to pay some deposit to your forex brokers that may range from 0.25% to 5%. For a lot of $100,000 (unit of currency) the security deposit is usually 1% ($1,000). This is measured a minimum deposit. If you are having some experience, and have been using the day trading system, it is not as if the market is in disorder, your invested amount will move-up or down. Quite often, accounts of inexperienced traders wiped off in this market. However, it is a zero sum business. If one trader losses and other gains and if everyone losses every time there would be very less participants in this market. It is always best to describe with an example.

How does all this work?

Let us take a standard lot of $100,000 USD against CHF. The current position to purchase Swiss is 1.0269 this means that for selling $100,000 you get 100,000 x 1.0269 = 102,690 CHF. You would have sold out dollars if you expected the dollar to decrease in price over the period of time you would be holding the CHF. Suppose your broker have sold dollars at 10.45 am GMT, the price at 3.30 p.m. GMT is 1.0247, and you buy back the same at $100,000 you have a profit of CHF 220 ($225) less the spread cost usually 5 pips which would be about $50 so the net would be about $170.

What happens when the trade goes wrong?

Let us just take an example that you are thinking this is cool and you can top up your deposit by $1,000 – so now balance is $2,170 and you do the same with USD/CHF pair. The next day the rate at 9.45 am GMT is 1.0250, and again you sell off dollars on bad employment figure news, expecting that the dollar might go down. Then the FED comes in and purchases dollars and by 4:30pm GMT, the dollar rates goes to 1.0370. You were hoping for a fall as you did not square up your position, you would find your self in the following position as follows:
$2,170 - $1,000 (Cost of lot) = $1,170 (security deposit/margin)
1.0369- 1.0250 = 0.0119 x 100,000 = $1,190
Your broker is liable to 'cut' your position, so that your account does not show a negative balance - this means that you have lost your $2,170. In these circumstances like this, you will be out of the market and out of the pocket if the Asian markets sell off the dollar with the continuing trend.
This example is perfect of two things, which you should stick on to -
First thing, do not trade by means of low deposit, just in case the above scenario happens. Secondly, if any position goes against you –it is better to target your personal stop loss rather a broker cuts your position.