Margin is defined as "the amount of equity required in a trading account in order to keep a position open", as a matter of fact; it is a kind of "faith deposit" or warranty that the trader does in order to ensure him against possible losses.
The margin allows traders to open positions with an higher value that the sum deposited in their account. A margin account is also defined as trading on a leveraged basis.
Today, most online forex sites give the possibility of a 200 times leverage. The equity given above the margin that is requested in a given trading account functions as a security or "warranty" on the trader's behalf.
In case the trade loses on a specific position to the point that the equity is below the minimum margin requirement, then, a margin called will take place. In most of the cases, at the forex arena, the trader will be requested to deposit more funds before the margin call, or else, the position will be closed.
The margin call is usually alleged as a "margin out" call, since no other calls are performed prior to liquidation. Another factor to have in mind is that the possibility of being margined out is proportional to the number of open positions (i.e., the more open positions, the easier is the account to get a margin out call).
Why a Margin? We have to keep in mind that leverage has two sides, on one hand, it can lead to profits and increase the investment return, but, on the other hand, without an appropriate risk management, it may cause rapid and significant losses.
We should remember that most forex online sites offer leverage, yet, the trader should be aware of the perils of "over-trading" and should learn how to manage an overall risk.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment