I still don’t understand margin. I want to because I don’t want to lose money.
I have a learning difficulty and all these numbers and things just confuse me!
I find it so hard to remember all the terminology and I feel D-U-M-B
It was suggested to me by someone who trades Forex to start off with £150
At the moment i’m only looking to trade GBP/USD
I understand what margin and leverage is but I have no idea how to use it in Forex trading and how I can lose money from it.
I don’t even know what to ask you guys, I am just confused with literally everything.
Don’t worry too much it will all fall in place for you but typically margin is like your broker asking for a holding deposit on your trade before you enter the position. For example CMC markets take 0.2% deposit on GBPUSD positions. So to trade a $1000 pound position, the cost of the margin is only $3.65 and the value of 1 pip is 0.13 cents, that is my $AUD example. It will be different in your native currency and most broker platforms show you these figures when you place the trade.
Margin level is quite important fact in forex trading. Because forex profit and loss mostly depend on the margin level. In the beginning it was also confusing for me. But I try to memorize it in my own way. The amount that was asked by your broker to hold before entered into any position is known as margin. The amount could be different for different currency pairs. I think that’s why it is confusing for you.
If you don’t understand these numbers and concepts, then shouldn’t you give up on forex? Especially if you haven’t invested a lot of money yet. You should at least trade on a cent account, that way the forex will become more transparent and it also won’t hit your deposit.
You can’t lose money from it. Unless your broker is shady, there is no such thing as negative balance. If your balance reaches zero, all of your positions are automatically closed and you cannot lose more than what you’ve put into your account.
What leverage does is influence the amount of units you can trade with the same amount of money. Increasing the amount of units you trade increases the percentage of your account you are risking, but it will never go above what you possess inside it.
This is assuming an identical stop loss size.
The way I like to see it, is that leverage influences the speed at which you can lose money.
Suppose you know that a kilogram of apples which price is now 1 dollar per kg will rise to 3 dollars per kg in a week.
You have only $200 and if you want to profit from this price increase you can buy one kg sell in one week and get $600. Your profit (change in equity) = 600-200=400
If you want to make more profit you need more money. You take a loan in a bank of $10000 and buy apples at 1$. Selling it at 3$ in one week will yield 30000-10000=20000.
Here we made an assumption that you know with certainty that price will rise. But in real world price can fluctuate up or down from the actual price. Bank that gives you the loan knows that and to protect itself from losses will ask you to provide collateral in case the price will go against you.
The problem is that you have only 200. Is it sufficient collateral to 10000 loan? Very liquid markets (which provide an ability to instantly sell an asset into means of exchange i.e. money) like forex says YES! But imagine that apple market is also very liquid market. What does it mean? It means that the bank, in case the price of apples will go against you can forcefully liquidate your position (sell apples) to get back the loan of 10000.
Here you can ask what is the limit price that bank will sell my apples if price goes against you to get back his loan. In other words what is the max price drawdown? Lets calculate:
You have only 200. You take 10000 loan and buy 10000kg apples at 1$ per kg. What happens if price drops to 0.5 per kg? Selling your Apples will yield only $5000. So the loss is $5000. Bank will receive only 5000 what is substantially lower than original 10000 loan. In other worlds bank should liquidate your position at much lower price drop.
But at what price? Obviously where the loss doesn’t exceed your original collateral of 200 dollars. We can find it from the equation price*10000kg=9800. The limit price at which the bank will liquidate your position is 0.98 dollars per kg. It will get 9800+your original 200= 10000. No risks for bank.
Here we get to the margin definition. Margin is your collateral expressed in percents. When you open position at the price of 1$ per kg, your margin is 100%. You still lost nothing. If the price drops to 0.99 (you have apples equal to 9900 dollars) margin drops to 50% because you lost 50% from your collateral. If the price rises to 2$ per kg(20000 position) your floating gain is 10000$ dollars or about 5000% margin.