Margin Trading
Hello, everyone! We continue to delve into the knowledge of Forex. Today in the article, I will try to explain to you in an accessible language what margin trading is without knowing whether the path to the foreign exchange market is “ordered” for you.
Trading in the Forex currency market is carried out in lots. We will use dollars to make the article easier to understand. What to do if you do not have such an amount? Do not be upset; brokers (intermediaries) between you and the exchange will come to your rescue. They offer you margin trading.
Margin trading is trading using borrowed funds against the security of a specified amount of margin. In other words, the broker provides you with borrowed funds to open transactions on the currency exchange.
So:
How to enter the Forex market mini-lot if the standard lot is 1, you ask?
A broker “collects” mini lots from their clients, combines them, and brings them to the foreign exchange market. How? We won’t go into details now.
A micro lot is used in cent accounts and is not displayed on the market. Trading is carried out within a brokerage company.
Let’s say you have $1,000 and want to enter the foreign exchange market. At the same time, the broker provides you with a loan and takes you to the market where you can buy or sell, but at the same time, he sets a margin (or markup) depending on the leverage.
Leverage is the borrowed funds that the broker allocates to you for transactions. Leverage allows you to make transactions for amounts exceeding the trader’s funds on deposit.
For example, with a leverage of 1: 100, you can make trades with 100 times the volume. With $1,000 in your account, you buy a standard lot of $100,000. Accordingly, the margin requirements, depending on the size of the leverage, are different.
Let’s take a closer look at what margin is.
We know that margin is a pledge. Now how is the deposit calculated?
Consider an example: A trader has $1,000, opens an account with a brokerage company with leverage of 1/100. In the terminal on the EUR/USD currency pair, he opens a deal with a lot of 0.1, we know that a lot of 0.1 is equal to $10,000. From the amount of the trader ($1000), a deposit (margin) is withheld according to the formula:
A / K x T
Where: A – lot price, K – leverage, T – the current rate of the currency pair.
What we see from the trader:
$10,000 / 100 x 1.3485 = $134.85
Now you know how the margin is calculated, you can use the trader’s special Forex calculator to calculate it on the broker’s website.
Let’s go back to the trader. The margin amounted to $134.85. We can conditionally say that this is a fireproof amount—a pledge. When it is reached, a margin call occurs, and the deal will automatically close.
What is a margin call?
A margin call is a request from a broker to a client to deposit additional collateral into their account. In other words, you need to replenish the account as there is a shortage of funds in the account. If this does not happen, the broker closes the trades.
Remember, the broker will never risk his funds; he will not be at a loss. He will automatically close the deals and that’s it. Uncle Kolya came to you (margin call in the slang of traders).
Each broker establishes its own guidelines for the number of current losses that trigger a margin call. Be sure to read his rules before opening an account with him.
You need to monitor your margin and, in the event of strong movements in the market, you need to adjust its level by opening new transactions (securing) or replenishing your account.
So what about the trader? Let’s get back to him.
With $1000, the deposit was $134.85. Free funds before the arrival of Uncle Kolya remain at $865.15, and he can operate with this amount.
The trader opened a deal to increase the euro and stood in the bay (bought with a lot of 0.1). The current quote of the EUR/USD pair is 1.3485, but the dollar strengthened, and the rate went down. One point with a lot size of 0.1 and leverage of 1/20 with a five-digit quote is equal to $1.
The margin call will work at a price of 1.2619 and $134.85 will remain on the account, which is naturally not enough to open a new transaction. The trader will have to replenish the account or forget about Forex.
If several trades are open and a margin call occurs, trades begin to close beginning with the most unprofitable. In the averaging article, I described in more detail the cascading closing of margin call trades. I suggest you read the link.
That’s all. I think I have clearly explained to you what margin trading is. I hope Uncle Kolya doesn’t come to visit you. Join our Telegram channel for market updates. Good luck to all!
