How Forex Works (Session 9)
Margin Trading
Forex employed a powerful leverage machine called margin trade.
Basically unlike the money changer that we call know where the leverage is 1:1, the forex brokerage house give you a leverage of say 20:1, 50:1, 100:1.
Oanda gives at most 50:1
With a starting capital of USD$10,000 and if you choose to trade the entire $10,000, Oanda with 50:1, permits you to buy USD$10,000 x 50 = USD$500,000 worth of foreign currencies.
Say the exhange between GBP/USD is 2.000 that is 2 USD change 1 pound.
With USD$500,000 you can change GBP250,000
Now assuming the GBP/USD move to 2.0010 or 10 pips and now you decide to sell your pounds and get back your USD.
You will get for every 2.0010 USD for 1 pound, since you have GBP250,000, you will get USD500,250. Basically you profit USD250.
Calculating USD250 out of USD10,000 gives you a 2.5% return on investment. This is only one day and definetely beats the interest you receive from your banks. Do the same calculation for stocks, you may not get such a good return on investment!
But likewise, if the direction you placed is against you. You lose USD250 for a 10 pips movement change. If the trend continue, say now you are 100 pips in the wrong direction, you are losing USD2500. That is a quater of your capital.
What is margin call?
It depends on broker. But say, the broker you are using will issue a margin call when you have lose all your capital. When you are 400 pips in the red, which is USD10,000 loses, you will get a margin call. For such a broker, it may just close your transtion and you take lose. The next day you will see that your entire capital is wipe out.
Margin work for you -leverage, but it can also work against you. So make sure you have always enough margin or "running capital" just in case, the price movement is against you and so that you can hold on to your position without getting a margin call.
Some broker permit you to go into the red and ask you to top up the difference. Beware! For such a case you are subjected to unlimited loses that is more than your capital. But of course, broker are also caution and do not want to risk such a case, when you can easily run away! they will give margin call warning before your capital run low.
Forex employed a powerful leverage machine called margin trade.
Basically unlike the money changer that we call know where the leverage is 1:1, the forex brokerage house give you a leverage of say 20:1, 50:1, 100:1.
Oanda gives at most 50:1
With a starting capital of USD$10,000 and if you choose to trade the entire $10,000, Oanda with 50:1, permits you to buy USD$10,000 x 50 = USD$500,000 worth of foreign currencies.
Say the exhange between GBP/USD is 2.000 that is 2 USD change 1 pound.
With USD$500,000 you can change GBP250,000
Now assuming the GBP/USD move to 2.0010 or 10 pips and now you decide to sell your pounds and get back your USD.
You will get for every 2.0010 USD for 1 pound, since you have GBP250,000, you will get USD500,250. Basically you profit USD250.
Calculating USD250 out of USD10,000 gives you a 2.5% return on investment. This is only one day and definetely beats the interest you receive from your banks. Do the same calculation for stocks, you may not get such a good return on investment!
But likewise, if the direction you placed is against you. You lose USD250 for a 10 pips movement change. If the trend continue, say now you are 100 pips in the wrong direction, you are losing USD2500. That is a quater of your capital.
What is margin call?
It depends on broker. But say, the broker you are using will issue a margin call when you have lose all your capital. When you are 400 pips in the red, which is USD10,000 loses, you will get a margin call. For such a broker, it may just close your transtion and you take lose. The next day you will see that your entire capital is wipe out.
Margin work for you -leverage, but it can also work against you. So make sure you have always enough margin or "running capital" just in case, the price movement is against you and so that you can hold on to your position without getting a margin call.
Some broker permit you to go into the red and ask you to top up the difference. Beware! For such a case you are subjected to unlimited loses that is more than your capital. But of course, broker are also caution and do not want to risk such a case, when you can easily run away! they will give margin call warning before your capital run low.
posted by Ernest Seng at 9:30 PM
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