What is a Margin Trading?

Margin Trading allows you to buy and sell currency for currency without actual currency exchange. All deals are held on base of netting, i.e. offsetting of debts, without delivery of actuals.

The purpose of Margin Trading is currency arbitration and a withdrawal of an exchange rates difference.

One of the conditions of Margin Trading is an arrangement of a pledge or a margin on the bank account by the customer. This pledge or margin will be considered as a guarantee or customer’s arbitration transactions. This means that trader cannot loose more than the amount of a margin.

The second feature of Margin Trading consists in a granting of so-called leverage. Leverage is a certain coefficient, a ratio between maximally allowed amount of traded currency and size of a margin.

Let us suppose that your trade deposit equals to USD10000.00.

The leverage would be equal 100, or 1%. The leverage expressed in % is called a minimal margin.

Maximal amount of trading currency, allowable upon such a margin, would be:

USD10.000 * 100 = USD1.000.000. In other words, trader should have 1% of a trading sum.

By using a leverage it is possible to multiply your potential profit.

The amount a margin of a customer and obtained profit (or loss) is called a variation margin. The ratio of minimal margin to a variation one cannot exceed 100%, or one (figure).

On the strength of its speculative orientation, each transaction of Margin Trading consists of two matters: opening and closure of a position – a full trade. While the transaction was not closed by a contrary dealing, a broker has a recording of open position. At present there are recognized two types of lots: standard and mini. As a rule mini lot 10 times lesser than a standard one.

Marginal security for contract (margin) = 1% of market value of base currency * the volume of contract in lots.

I.e. for pairs EURUSD, EURJPY, EURGBP, while market rate of EUR = 1.3357 and volume of a contract = 1 lot, the margin would be USD13335.7.

Margin Call Level – warning level (usually about 30%).

Stop Out Level – unprofitable deals closure level (usually about 20%)

Calculation of % Margin Call = (Equity / Margin) * 100% , where

* Equity is a current level of customer’s funds
* Margin is a current customer’s margin

Vocabulary

Margin - is a term that is generally accepted in stockbroker and bank practice. It means a guaranteeing amount for credit granting.

Margin Trading - a trading with a usage of borrowed current assets, granted by a dealing center or a brokerage firm, loaned against a certain pledge (marginal pledge).