Forex margin trading - what not to do?
Barry Copeland
04 / June / 21
Visitors: 541
Margin trading is trading through speculative transactions using a loan, when a trader can carry out transactions for amounts that are many times greater than his own funds. As collateral are the funds provided by the brokerage company to the trader. Pledged funds allow securing this credit and are expressed in the currency of deposit (for example, in USD - U.S. dollars). Margin depends on liquidity of a trading instrument (commodity).
Provision of margin (or credit) leverage is a peculiarity of this type of trading.
Leverage is the ratio of the margin amount to the trading operation amount. For example, the ratio 1:100 shows that for transaction on the trading account it is necessary to have the sum 100 times less, than the sum of transaction. A margin loan has much more leverage as opposed to a regular loan. At the same time, the loan amount is much higher than the collateral amount. This allows you to make buy or sell transactions with larger volumes. Which also increases the risk of losing funds, because with the increase of the volume the collateral increases, and therefore the load on the deposit.
Margin level is expressed as ratio of trader's funds to the used margin expressed in percents. Each broker determines the minimum allowable level of margin. In this case if there are not enough funds for trading operations on the account, the broker informs about approaching the minimum allowable amount of funds in the trading account. This phenomenon is called a margin call.
At margin trading company-broker is also called liquidity provider, because it provides the opportunity to trade operations on the currency market. As a liquidity provider for the trader is the broker, where the trader has opened a trading account. However, a broker himself usually avails himself of services of higher liquidity providers, i.e. banks. As a rule, the bigger the liquidity provider is, the higher requirements are set for the amount of pledged funds to open positions. It is difficult for a regular trader to get access to the liquidity providers of higher order directly, so he uses services of a brokerage company.
Margin trading allows a trader to make transactions at the inter-bank currency market, which unites more banks, hedge funds, market-makers and so on. The credit funds provided by brokerage company are a part of the contract expressed in money equivalent (or another type of assets) that has to be paid by a trader when making a deal at currency market, stock market, futures, options and so on.
Conditions for receiving a margin loan:
Obtaining a margin loan does not require a specific contract or arrangement;
Cash (or other assets) held in an account with the company providing the loan serve as collateral;
Any of the assets traded by the broker can serve as a credit;
Within one trading session the loan is provided free of charge;
Further the company, as a rule, charges a fee (swap).
