subject: Avoid A Margin Surprise Day Trading In Fx [print this page] Despite the fact that personal investors think that they understand margin swing trading, they can sometimes create a unprofitable situation. Take advantage of the tips below to be familiar with some common mistakes investors make in terms of margin short term trading in foreign exchange.
The risks involved in foreign exchange trading are naturally amplified by increasing the amount of money you trade. While many resources about forex trading address profit potential, the amount of risk in currency pairs swing trading helps it to be as important to become aware of the worst case outcome. Margin calls are often the worst-case scenario among newer currency pairs traders.
Everyone knows that you ought to never speculate with more than you can lose yet many people in foreign exchange use margin to trade their account. Don't forget that margin short term trading represents using some of your own money, and boosting your buying power by also using borrowed money to purchase currency pairs. The money in your account will be represented as a total, but you should never omit consideration of the amount borrowed. If someone puts in only 2% of the value of the account, the 50:1 margin, losses accounting for in excess of 2% of the balance in your account means that you are losing money due to the fact that you are exceeding the money you put in, and are now dipping into borrowed money.
Consider the possibility of losses when you are thinking about day trading on margin. There is quite a bit of valid advice about maximizing your buying power by seeking out the largest margin ratio one can get from a fx broker. This advice is good because higher ratios mean that you'll have to put less money down as a percentage of what you are able to borrow. However, it is very important to not forget that you are borrowing more as the ratio increases higher. If you somehow have an individual trading account with four hundred to one margin, meaning you would only have to have 1/4% of your money which is borrowed on your margin account rather than the more typical 2 percent or 5 % of the money you are using to trade, your losses can be much higher because you are borrowing more of the money you are making use of to trade currencies.
Different brokers have different rules about margin swing trading. In addition to different ratios of borrowing available to traders, many brokers have different rules about how and once they will stop your short term trading if you have not enough capital in the trading account to meet the margin requirements for your trading account. Scrutinize this ruleset. Some brokers will probably emphasize that they have 2 levels which they will notify you about: the margin call level based upon a larger quantity than is typically required by your margin ratio, and a close out level at which point your account can start to automatically be liquidated until it achieves sufficient levels to meet minimum margin requirements.
Most fx brokers will indicate they make available a notification policy when your trading account reaches levels where you are going to have a margin call. The notification may be in writing or a phone call but either way it is up to you to meet the call irrespective of whether you actually received notice or not. Similarly, some brokers will provide you with up to 48 hours to meet the call. It all depends on the current situation.
It your trading account is suspended, closed or liquidated many brokers will inform you that they can seek to get back monies which are unpaid through a lawsuit. This is true for most types of loans investors should pay attention to it. Simply giving instructions to close your account may only provide a portion of the repayment for your loan. The balance would be achieved through a repayment schedule or a lawsuit.
Currency Pairs traders who believe they understand the concept of margin short term trading are still able to get into trouble resulting from the risks involved. Utilize the tips above to spot common oversights margin traders often make that can cause the loss of money.
by: Jamey Vaneck
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