- Forex Basics
- Japanese Candlesticks
- What Are Japanese Candlesticks?
- Bodies, Wicks and Shadows
- The Doji Candlestick Pattern
- Candlestick Engulfing Pattern
- Hammers and Hanging Man
- Piercing Pattern and Dark Cloud
- Morning Star and Evening Star
- Harami Patterns
- Shooting Star and Inverted Hammer
- The Kicker Signal
- Three White Soldiers and Three Black Crows
- Three Inside Up and Three Inside Down
- Three Outside Up and Three Outside Down
- Concealing Baby Swallow
- Upside Gap Two Crows
- Advance Block
- Three Stars In The South
- Two Crows
- Unique Three River Bottom
- Moving Averages
- Elliott Wave Theory
- Oscillators/Indicators
Leverage and Margins
Leverage trading, or trading on margin, means you aren't required to put up the full value of the position. Which is good news for traders that don't happen to have several hundred thousand dollars to throw around.
Leveraging
Forex trading offers more leverage than stocks or futures - up to 400 times the value of your account. Most brokers are usually in the 100:1 or 200:1 range. Of course keep in mind that increased leverage also increases your risk.
At most if not all brokers, your risk is only limited to funds on deposit. There are usually no margin calls in forex trading, so if your account falls below required levels, for your protection most brokers will close out some or all of your positions automatically. You'll never lose more money than you have in your account.
The amount of leverage you use will depend on your broker and your comfort level.
Typically the broker will require a minimum account size, also known as account margin or initial margin. Some brokers will even open an account with as little as a couple hundred dollars, but you will find out why this might be a bad idea. We would recommend a minimum deposit of $1000 for a micro account. The broker will also specify how much they require per position (lot) traded (i.e. the Margin).
Margin
The minimum security (margin) for each lot will vary from broker to broker. In the example above, the broker required a one percent margin. This means that for every $100,000 traded, the broker wants $1,000 as a deposit (or margin) on the position.
For example, for every $1,000 you have, you can trade 1 standard lot of $100,000. So if you have $5,000 they may allow you to trade up to $500,000 of Forex. Again, as you will see, this is probably a bad idea. You should never use all your available margin during your trading.
So you open an account with $1000. You place a trade for 1 standard lot of $100,000, and using your 100:1 leverage your margin is $1,000. Now your available margin is $0. If your position moves against you by 1 pip, your available margin is negative, and the broker will most assuredly immediately close your position. Even if the price now suddenly moves with you by 100 pips, your trade is already closed out. You didn't leave any room for your trade to move. Of course, due to the spread, your broker wouldn't have even let you make this trade as your account balance would have been negative the instant you placed the order anyway.
The protection provided by the margin is evident in this example. While your available margin was 0, once your trade closed out, your used margin is returned to your account, less the trade losses. So in this example, you would have lost only $12 of your account value (don't forget the spread).
Lets look at another example:
You open up a mini-account with $1000. This time, you decide to place an order for 2 mini lots (essentially 0.1 standard lot). The contract size is now $10,000, which means with your leveraging of 100:1, your margin requirement is only $100 per lot, so $200 total.
Now you have $200 used margin, and $800 available margin. Now your position has room to breathe. Lets say, for example, that it moves against you by 10 pips. On a mini account like this, it would be a $10 move ($1 per pip). Your available margin is now $780. More than enough available that the broker won't close out your position. Now it moves in your favor by 70 pips and you decide to close the trade. The initial 10 pip loss doesn't even matter at this point, since your trade remained open, and instead of a loss, you now have a $70 profit (less the spread).
Can you see the power of leveraging and margin?
It's crucial to remember: increasing leverage increases risk. To limit downside risk, monitor your account regularly and use stop-loss orders on every open position. We will talk more about stop losses and other order methods a bit later. Just remember that leveraging can work for you, but it can also work against you.
