How does margin work?

D

DannyBens

Hello,

I am trying to understand exactly how margin in a Forex account works.
The information provided by the different brokers/dealers is vague at best.

I believe I can sum up my confusion in one question: Is margin calculated per position or for the entire account?

An example:
Assuming I have $10,000 in an account with 1:100 leverage.
I then buy one lot at $100,000.
Does this now mean that I am using only a 1:10 leverage and can lose the entire $10,000?

Now assume I am trading on a different pair, and opening another $100,000 position.
Does this now mean that I am now at 1:20 leverage?

so
1. If so, is it accurate to say that the more positions I open, I am riskins LESS of my money per position?
2. Dont I have an option to always use the maximum leverage, and risk only $1,000 per position? (without stop orders)

Thanks in advance for any answer, or reference to one.
 
1:100 leverage equals 0.01 margin.
1:20 leverage equals 0.05 margin.
1:10 leverage equals 0.10 margin.

etc, etc, etc.

1:100 leverage means you can buy 100 times the funds in your account. So $10k lets you buy 1 M units at 1:100 leverage.

Mind that some forex brokers set different leverage for different pairs, so you can not always addup the positions. And you can lose all your funds deposited.
 
I've seen some madmen that have 400:1 margin. Personally, I think this to be ridiculous.

I use 20:1. That's what I fee comfy with.
 
Margin is based on the contract. A 1:100 margin means you can trade a 100,000 contract with 1000. With 10,000 you can trade ten 100,000 contracts. Note that your positions will be closed as the equity in your account drops below the margin required for the positions you carry.

Some brokers specify the margin at which you can receive over night interest. E.g. you may be able to open a position with a 1:100 margin, but if you want to receive interest from the crediting side of your trades you may need to adjust your margin to 1:50, etc.
 
With Refco Forex accounts the maximum loss is what you have left in un-used margin. So always use stops on all orders.

Example:

* You deposit $1000 into mini 200:1 account and place an order for a 50K lot for $250.00. With no stops max loss is $750.00 not the $250.00.

* If you place an order for a 180K lot for $900.00 max loss is only $100.00 with no stops.


ALWAYS USE STOPS.
 
Thank you all, very helpful.
uninvited_guest, another question rises based on your explanation, if I may.

Based on what you are saying, if I open another (second) 50k position, with $250, than the maximum loss on both positions is smaller (i.e. the remaining $500 in unused margin), and opening 3 positions decreases the risk even further to $250. Did I get it right?

Ivanovich - what are the reasons that one should prefer smaller leverage, assuming that a) stops are honored at any time and b) positions are closed if your account drops below maintenance margin?

Thanks again, appreciate the help.
 
Quote from DannyBens:

Based on what you are saying, if I open another (second) 50k position, with $250, than the maximum loss on both positions is smaller (i.e. the remaining $500 in unused margin), and opening 3 positions decreases the risk even further to $250. Did I get it right?
More...

Yes that is correct, with Recofx mini-accounts. I don't know how it is with other brokers.

Also you can only trade at 1 margin level per account. You can't trade at 200:1 and 100:1 in the same account. You will have to have 2 accounts to trade at different margin levels. Recofx lets you have more than one account under same log-in, and both accounts show up on your screen at the same time.
 
Quote from uninvited_guest:

Yes that is correct, with Recofx mini-accounts. I don't know how it is with other brokers.
More...
Interesting.
Can someone comment on this - is this a standard practice with other brokers as well, or is RefcoFX unique in this sense?
 
This is for scalpers who have tight stops and trade several hundred times per session. But those 400:1 firms do not have the narrow spreads these scalpers need.


Quote from Ivanovich:

I've seen some madmen that have 400:1 margin. Personally, I think this to be ridiculous.

I use 20:1. That's what I fee comfy with.
More...
 
Quote from DannyBens:

Interesting.
Can someone comment on this - is this a standard practice with other brokers as well, or is RefcoFX unique in this sense?
More...

I don't know about margin calls, but I doubt if what the other guy said is correct. Mind that you are liable for the funds in your account. If you take on a 150k position in the example above, this would not mean you could maximally lose $250. If this is true, this could be used as a guaranteed stop, wow, some guys could really use that during NFP.

My view is that the margin level is like a stop where all your open positions are liquidated, but slippage is probably still possible - but not below zero.

But you'll have to ask someone who knows about margin calls to be sure how this works.
 
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