Leverage in Currency Trading
11/07/2016 // 05:26:22 pm
Intensify Your Trading Results
Leverage financed with credit, such as that purchased on a margin account, is very common in Forex. A margined account is a leverageable account in which Forex contracts can be purchased for a combination of cash or collateral depending what your broker will accept. TTS MARKETS accepts cash only as collateral. TTS MARKETS cautions traders that leverage can significantly work against traders by compounding loses.
The deposit in your trading account is collateral for your trading positions. If the account equity drops below your margin, your positions will be liquidated. The margin used to open those positions will be left in your account for future trading.
Margin rules may be regulated in some countries, but margin requirements and interest vary among broker/dealers. Therefore, always check with the company with whom you are dealing to ensure you understand its policy.
Up until this point, you are probably wondering how a small investor can trade such large amounts of money (positions). The amount of leverage you use will depend on your broker, your comfort level and statutory considerations. Leverage in the United States set by statute at 50:1 and 20:1 depending upon the currency pair traded.
Typically, the broker will have a minimum account size, also known as account margin or initial margin e.g. $10,000. Once your initial deposit has cleared, you will be able to trade your account. The broker will also stipulate how much they require per position (lot) traded.
In the example above, for every $1,000 you deposit, you can take a $50,000 position.
The minimum security (Margin) for each lot will vary from broker to broker. In the example above, the broker required a two (2) percent margin. This means for every $50,000 traded, the broker wanted $1,000 as security on the position.
Margin call is also important to understand. Margin call is the broker's demand on an investor using margin to deposit additional money to bring the margin account up to the minimum maintenance margin. Margin calls occur when your account value depresses to a value calculated by the broker's particular formula.
If you are going to trade on a margin account, it is imperative that you understand your broker's policies on this type of account.
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