Forex FT – Online Tutorial Part 6
1. The Margin of Forex FX trading
Banks and all the other
dealers of currency exchange deals for opening a forex account to individual
investors (retail customers) need collateral to ensure that investor can pay in
the event of a loss.
In financial derivatives
and in commodities trading world we use to call this collateral as “margin”. In
the forex market is also known as minimum security. Actually, this collateral intends to cover
any currency trading losses of the individual investor.
One of the fundamental
characteristics of the forex FX market is the big leverage (I will provide a
large number of financial leverage in future posts), very simple an individual
through financial leverage can expose his position 2, 4, 7 and 100 times the
initial deposit.
S.O.S. Mayday – S.O.S.
Mayday – S.O.S. Mayday
Leverage is a very serious
and dangerous issue!!!
Leverage offers
opportunities but also it was the main reason for many losses even the fail out
of international banking corporations and countries.
Summary
Leverage allows the
individual investor to participate in markets by enable them to hold a much
larger position than their account value.
2. The maintenance margin
Very simply maintenance
margin is the amount of money an investor must deposit to hold his position.
All banks and dealers running risk management applications to manage the
exposure of them, on part of this exposure is also the exposure of their
clients.
Another approach of the
margin definition, in my humble opinion the correct approach is to use for both
of them the Security Deposit definition.
So margin or Security
deposit is the amount needed to open or maintain a position.
3. Margin Call
In case your position is
against the market, you are losing. The dealer needs to ensure that you can pay
the loss. So, dealers will call (email, electronic notice) and inform you to
close the your position (I’m going to offer a detailed post about positions –
orders and closing positions in forex dealings).
Elias Stoikos
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