Wednesday, March 25, 2015

Margin balances and liquidations

When you open an online currency trading account, you’ll
need to pony up cash as collateral to support the margin
requirements established by your broker. That initial margin
deposit becomes your opening margin balance and is the
basis on which all your subsequent trades are collateralized.
Unlike futures markets or margin-based equity trading, online
forex brokerages do not issue margin calls (requests for more
collateral to support open positions). Instead, they establish
ratios of margin balances to open positions that must be
maintained at all times.
Here’s an example to help you understand how required
margin ratios work. Say you have an account with a leverage
ratio of 100:1 (so $1 of margin in your account can control a
$100 position size), but your broker requires a 100% margin
ratio, meaning you need to maintain 100% of the required
margin at all times. The ratio varies with account size, but a
100% margin requirement is typical for small accounts. That
means to have a position size of $10,000, you’d need $100 in
your account, because $10,000 divided by the leverage ratio of
100 is $100. If your account’s margin balance falls below the
required ratio, your broker probably has the right to close out
your positions without any notice to you. If your broker liquidates
your position, that usually means your losses are locked
in and your margin balance just got smaller.
Be sure you completely understand your broker’s margin
requirements and liquidation policies. Requirements may differ
depending on account size and whether you’re trading standard
lot sizes (100,000 currency units) or mini lot sizes (10,000
currency units). Some brokers’ liquidation policies allow for
all positions to be liquidated if you fall below margin requirements.
Others close out the biggest losing positions or portions
of losing positions until the required ratio is satisfied again. You
can find the details in the fine print of the account opening contract
that you sign. Always read the fine print to be sure you
understand your broker’s margin and trading policies.

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