Using Margin Calls to Your Advantage

June 16, 2009 by  
Filed under Forex Trading

There is a lot of money to be made in Forex trading, but unfortunately just as much can be lost. You’ve heard the technical garb about margin calls, moving averages and graphs, and understand it’s important to understand what the market’s doing whether you have a broker or perform your trades yourself.

Hundreds, even thousands of dollars can be made in a few minutes or hours if you know what you’re doing. First, remember that most of your trades will require quite a large margin in order to create your desired profits. The more money you utilize in Forex trading, the more those small differences in currency exchange rates become profitable.

If you have a broker that offers a 1% margin, which is quite common, this means you need to front this 1% of your total investment, and borrow the other 99% form your broker. Now, when you invest $100,000 total, with $1,000 margin, let’s say your current rates increase enough to sell at a total profit of $650. Just because you only put up 1% of the money doesn’t mean you only get to keep $6.50; the entire amount goes to your pocket.

However, let’s assume the worst for a moment so it’s possible for you to understand the seriousness of the Forex market trading world. Let’s say you make the same margin call, speculating that your currency exchange rate will increase. Instead, it begins to fall slightly, and the broker is not convinced it will recover. Perhaps he knows nothing of your personal situation, and decides to cut his losses short. He sells your yen and declares a loss on your behalf.

A Forex broker can execute this call legally and ethically, without your prior permission; it is totally dependant upon his judgment of the situation. This action would leave you indebted to your broker for the amount he lost in the margin call.

This is why it’s so important to establish a good relationship with your broker, and instill confidence that you are credit worthy. Understand your Forex broker’s margin call policy, and READ THE FINE PRINT before signing anything. You broker is entrusted with your investment, yes; but he is also in the business of making money, and with 1:100 margin calls in the Forex market, he has to cover his end and watch out for his own interests. Unfortunately, this probably means you’re stuck in a losing situation.

There are several advantages to using a Forex broker, specifically the ability to perform these duties on your behalf while you’re doing more important things at the moment. However, this possible scenario speaks to how important it is for you to understand the Forex market you’re involved in and the general direction of the market.

Try doing nothing but studying the currency exchange rates for at least a month or two before jumping in with your own money. Place pretend calls and wait to see if your predicted movement will happen. Just like anything else in life, with practice you’ll be almost perfect, readying you for the added risk of engaging in margin calls.

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