Margin Trading: How Trading on Margin in the Forex Market Works
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In our last lesson we went over the concept of leverage and how the use of leverage in trading can be used to amplify both gains and losses on ones trading account. In today's lesson we are going to continue our free forex trading course with a look at the mechanics of using leverage in the forex market.
As we discussed in our last lesson many people put down 20% in cash to obtain their mortgage, which puts their leverage at 5 to 1. The 20% down payment that many home buyers put down to obtain their mortgage is the equivalent to the margin that a trader puts up to purchase a financial instrument such as a currency pair when trading on margin.
Most forex trading firms will offer leverage of up to 100 to 1 or more, which requires traders to put up only $1000 in margin for every $100,000 in positions traded. If fully used this would take a 1% move in a currency pair and turn that move into a 100% gain or loss on the value of your account.
The easiest way to understand this is by seeing it in real time by logging into our real time demo trading accounts. If you have not done so already I encourage you to register for a free demo using the link above this video if you are watching on InformedTrades.com or to the right of this video if you are watching on Youtube.
Once logged into the platform, in the upper right hand corner of the platform you should see a window that says "Accounts". In this window from right to left you should see the following columns:
1. The Accounts Column: This lists your account number and if you were trading multiple accounts the other accounts you were trading would be listed here as well.
2. The Balance Column: This lists the amount of money in your account not including any profit or loss on open positions.
3. The Equity Column: This lists the amount of money in your account including any profit or loss on open positions.
4. Day P/L: This is the gain or loss on any open positions for the trading day which begins and ends at 5pm Eastern Standard Time on this particular platform.
4. The Usd Mr Column: This stands for Used Margin and is the amount of money in your account which has been allocated for margining your open positions. If you have no open positions this column will read zero so go ahead and click on the dealing rates window and open a 1 contract position. If you have multiple positions open go ahead and close out the additional positions by clicking on the close rate in the close column beside those positions so that you have only 1 position open.
Once you do this you should see the amount in the Usd Margin column at $1000. If you remember from our previous lessons we are trading a contract size of 100,000 of the base currency, which puts the leverage which has been extended to us on this particular demo account at exactly 100 to 1 for currency pairs in which the US Dollar is the base currency and somewhere near 100 to 1 for currency pairs in which it is not.
5. In the next column over you should see a column that says Usbl Mr. This is the amount of money that you have in your account including any profit or loss on open positions, that is over and above the money allocated to margin any open positions in the account.
Another way of looking at this is that the Usable Margin Column is the Equity Column minus the used margin Column.
If the number in this column drops to zero then the trading platform will automatically generate a margin call and close the open positions on your account. With this in mind, it is important to always have a clear understanding of how much money you need in your account to open each new position so you do not over leverage yourself or worse end up in a margin call situation.
We are going to get into more in depth examples in our next lesson but to quickly demonstrate the relationship between the used margin and usable margin columns lets left click in the dealing rates window and open a 2 lot position of EUR/USD, which will bring the total in our account to 3 open contracts.
Once that position is open the number in your Used Margin column should have gone up by $2000 to account for the two additional contracts we just opened, and the amount in the usable margin column should have gone down by $2000.
As we discussed in our last lesson, not respecting the amount of leverage offered in the forex market is probably the number 1 reason why many traders not only fail when trying to trade the forex market but loose their entire account balance. While the market is not a volatile market in and of itself, you can turn it into a highly volatile instrument by upping the amount of leverage used, which puts your account balance and therefore trading career at risk.
Thats our lesson for today, in our next lesson we will look at several examples of leverage at work on our forex trading demo accounts so we can start to get a feel for what an appropriate amount of leverage may be so we hope to see you in that lesson.
As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading!
Other Links to Help You Learn About Margin Trading in the Forex Market
InformedTrades - Threads Tagged with margin
Elsewhere Around the Web
Margin: Forex Currency Trading Margins Defined
Forex margin Question - Forex Forum - Ask-an-Expert - GoForex
Hi David. I'm brand new to trading and I'm a little confused. First of all, I think my version of the demo software is set up for mini account trading, as my 'Amt K' menu options go from 10 to 1000 and my cost per pip is $1. Is there a way to change this setting?
Another thing I'm having trouble with is the used margin amount. If I open a 1 contract position (10K) on the USD/EUR pair, my used margin amount is $500. If the leverage is supposed to be 1:100, why isnt this amount $1000? Is my leverage simply set to a different ratio? If so, how can I change this?
I clearly need some help.
I have been trading and having the same problem as the person above me. I would greatly appreciate it if someone could help me!!!
Have a great weekend everyone!!! :)
Hi Pkevl and Uahmed,
Glad to hear from you and welcome to the community.
As the former FXCM Mini Account which traded 10K lot sizes gives traders the added flexability of trading a smaller contract size without taking anything else away from the trader, FXCM has switched all of their new accounts recently to trade the 10K contract size. So, with this in mind everything you see on the platform is going to be 1/10th of what I am showing in the videos where I am using a 100K contract. If you would like to trade 100K instead of 10K you can simply change the contract size to 10, 10K contracts which will get you the same thing.
The one exception here is leverage as on the Mini account the leverage offered is $50 per 10K contract which comes out to 200 to 1. With this in mind are you sure that you are not seeing $50 in the used margin column when you trade 10K and not $500?
If thats not the case or if there are any other questions please let me know.
Thanks David. You are correct, when trading a 10K contract size, the used margin is $50, not $500. Is there a way to change the leverage?
This site is great. Please keep it up!
Thanks for the comment I am glad you like the site.
When trading on FXCM's Regular account (formerly the mini account) you trade a 10K lot size where the minimum margin requirement is $50 per 10K traded.
Keep in mind however that this is the minimum margin requirement. If, for example, you have $10,000 in your account and trade 1 lot of USD/JPY then you have $10,000 in your account and $10,000 in open exposure. In this example the minimum margin requirement remains at $50 however you are not using any leverage because your account equity and open exposure are the same.
So, in short, you don't need to change the margin requirement on the account level, because you control how much leverage you use by how many positions you open in relation to how much money you have in your account.
Let me know if that does not make sense.
I'm almost there, but not quite...
If you have $10,000 in your account and you trade 1 lot of USD/JPY with a minimum margin of $50, I dont follow how this isnt 1:200 leverage. I see that the account and open exposure are equal ($10K), but the used margin (which you equated to a downpayment for house) is still $50. To my thinking, in this example we've put up $50 for a $10K contract. $10,000 over $50 is 200, right? Why isnt this 1:200 leverage?
Thanks for bearing with me.
No worries I am glad to help.
You are correct that looking at the minimum margin requirement then because you only have to put up $50 to trade $10,000 this is 200 to 1 leverage. So simply from the standpoint of what I am explaining in this video which is determining leverage based on the used margin column (which is the minimum you have to have in your account to keep the position open, you are understanding things correctly.
What I think it is also important to understand here however is that traders normally look at how much leverage they are using in relation to how much money they have in their account, which is seperate from the minimum margin requirement required to trade.
In other words just because your minimum margin requirement is 200 to 1 whether you have $1000 in your account or $10,000 does not mean that two traders with these differing account sizes should trade the same position size.
Hope that helps and let me know if you still have questions.
OK, I\'m understanding this very clearly now. Thank you.
What I am not understanding is this. Say I didnt want to trade at 200:1, how could I adjust this ratio to something more conservative?
Sounds good but that is what I am trying to explain, what determines how aggressively or conservatively you are trading is the size of position you trade relative to the amount of money you have in your account, not the minimum margin requirement.
To help understand this lets take two examples.
Minimum margin requirement 200 to 1
Account Equity: $10,000
Open Position Size: $20,000
Leverage: 2 to 1
Minimum Margin Requirement 20 to 1
Account Equity: $5000
Open Position Size $20,000
Leverage 4 to 1
So, as you can see from this example, even though trader 1 has a much lower minimum margin requirement, he is trading much more conservatively than trader 2 who has a higher minimum margin requirement. So you can see here that how conservative or aggressive you are with your account is a factor of how much money you have in your account vs. the position size that you trade not the minimum margin requirement. With this in mind you don't need to change your minimum margin requirement. To trade more conservatively simply adjust your position size.
Hope that helps.
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