Forex margin trading is simply a forex trading account which is 'leveraged'. This means effectively for every $1 you have as your deposit you have up to $100 to invest (this is the simplest definition for illustrative purposes only)
A typical account is set up in such a way that you would pay your forex broker a security deposit which ranges from 0.25% to 5%. The usual security deposit for a $100,000 lot (unit of currency) is usually 1% ($1,000).
This should be looked on as the minimum amount for a security deposit. If you have been used to day trading and have some experience behind you it is not uncommon to be 'up' or 'down' the amount of your deposit when the market is in turmoil. Quite often the 'swings' can wipe out the inexperienced traders account. However this is a zero sum business, one traders' loss is another's gain and if everyone lost all the time they would be very few participants in the market!
OK, how does all this work then?
It's always best by showing an example. Let's take a standard lot of $100,000 against CHF (that is USD against swiss francs). The current spot for buying swiss is 1.0269 this means that for selling $100,000 you get 100,000 x 1.0269 = 102,690 CHF. You would sell dollars if you expected the dollar to decrease in price over the period of time you would be holding the CHF. Assume that you have sold dollars through your broker at 10.45 a.m GMT and the price at 3.30 p.m. GMT is 1.0247 and you buy back the $100,000 you have a profit of CHF 220 ($225) less the spread cost usually 5 pips which would be about $50 so the net would be about $170.
What happens when the trade goes the wrong way?
Lets just say that you're thinking this is really cool and you top up your deposit by $1,000 - so it's now $2,170 and you do the same USD/CHF pair. It's the next day and the rate at 9.45 a.m GMT is 1.0250 and again you sell dollars on the back of bad employment figure news, expecting the dollar to go down and then the FED comes in and starts buying dollars and the dollar goes to 1.0370 by 4.30 p.m. GMT and you didn't square your position as you were hoping for a fall, you would more than likely find yourself in the following position as follows:
$2,170 - $1,000 (Cost of lot) = $1,170 (security deposit/margin)
1.0369- 1.0250 = 0.0119 x 100,000 = $1,190
Your broker is likely to 'cut' your position so that your account does not go into negative - this effectively means that you have lost your $2,170.
The tragedy in a situation like this is if the 'Asian' market came in and sold off the dollar continuing the previous trend you would be out of the market and out of pocket!
This a perfect example of two things which you should adhere to -
Firstly never trade with too low a deposit just in case the above scenario happens and secondly if a position goes against you -it's best to set your own stop loss rather than a broker cut your position.
http://moving-average-scalp-trading.blogspot.com
Moving average scalping.
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