Forex margin trading - what not to do?

Margin Trading at Forex Market 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).

Comments (0)

Investor pessimism is the worst since the 2008 crisis

According to BofA's monthly survey of fund managers, expectations of global growth and company profits have fallen to record lows. The liquidity level has reached its highest level in the last twenty years as investors have reduced their exposure to risky assets.

Monetary policy and the European energy crisis.

Ten-year BTP returns to the 91 euro zone with a yield of 1.909%, while Bud falls to 97 euros with a yield of 0.266%.

Orban: Ukraine is actually asking to block the Hungarian economy

In fact, Ukraine demands a complete shutdown of the Hungarian economy, Hungarian Prime Minister Viktor Orban said on Sunday, referring to the postulates on banning the import of Russian energy resources to the EU.

Inflation can lead to higher wages for all segments of the population

Representatives of the European Central Bank (ECB) are very concerned that the price increase may become a spiral that will also raise wages in the eurozone. The labor market is also facing further strengthening due to the military actions in Ukraine