Friday, July 16, 2010

What is...

Margin is a performance bond, or good faith deposit, to ensure against trading losses. The margin requirement allows traders to hold a position much larger than the account value. There are a lot of brokers' online trading platform has margin management capabilities, which allow for this high leverage. Some brokers have the most lenient margin requirement which is .5%.

In the event that funds in the account fall below margin requirements, the Brokers' Dealing Desk will close some or all open positions. This prevents clients' accounts from falling into a negative balance, even in a highly volatile, fast moving market.

For example, let's say you have an account with $10,000. That means you have $10,000 of usable margin. If you use $7,000 to buy 7 lots of USD/JPY, you now have $3,000 of usable margin left, meaning that you are allowed to lose $3,000 before you are under the margin requirement. The account equity remains at $10,000 until you begin to make or lose money on the position. Now, if the USD/JPY decreases to the point that you end up losing the $3,000 which is left in your account, then Broker's Dealing Desk will close all of your positions to ensure that you do not lose more than you have in your account.

Managing your risk in the financial market: If the equity in your account drops below the margin required to maintain your open positions, the dealing desk will close all open positions. This guarantees limited risk. You also have the ability to track your margin in realtime. In the accounts window you will see 2 columns: used margin; usable margin. The used margin indicates funds currency pledged towards open positions. You can think of usable margin as your “wiggle” room. Once usable margin reaches zero, a margin call will ensue & all positions will be closed, are subject to liquidation at the prevailing market prices by dealing desk this is the margin watcher feature.

Simply put.. Margin is the amount of necessary money needed to place/maintain a position.
Margin Level Percentage is calculated by taking:

Equity/Margin x 100 - Margin Level Percentage
Equity (your true Account Value) is your Balance +/- any open positions.In normally leveraged accounts.

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RISK WARNING: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. Before deciding to trade foreign exchange you should carefully consider your monetary objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your deposited funds and therefore you should not speculate with capital that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent advisor if you have any doubts. Past returns are not indicative of future results.
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