Newbie Leverage FXCM Questions!

Beginner Questions
1

Hello everyone,
I would like kindly ask some questions about leverage, but before I want to highlight the fact that I am a newbie but I read and watched some basic tutorials on several websites.Although, i didn’t find the answer I was looking for about leverage.

If I open a micro-account on FXMC with 50$ 400:1 but unfortunatelly I lose, what exactly I am going to lose, only my 50$ or the total amount 20.000$? Moreover, why my broker should borrow me such amount of money?

Thank you in advance for any further answer.

Kind regards,

Francesco C.

2

I have a micro account with FXCM already Francesco and you will only lose what is in your account. You won’t lose more than what you have deposited with them regardless of the leverage you use.

This really should be a question you should be asking your potential broker though rather than a question posted on a forum site because different brokers have different rules and one answer may not fit all

3

Hi Francesco,

Welcome to the forum :slight_smile:

As the HoG mentioned, your risk is limited to the money actually in your trading account.

You mentioned that your account is set to 400:1 leverage. That means for every dollar you set aside as Used Margin (Usd Mr in the Accounts window), you can control 400 in open positions. So if you set aside $50 is used margin, you could control $20,000 or 20k in USD/JPY for example. It’s important to note that FXCM is not lending you any money. If you buy USD/JPY, then you are going long a certain amount of USD and going short the equivalent amount of JPY. If you sell USD/JPY, then you are going short a certain amount of USD and going long the equivalent amount of JPY.

Suppose the USD/JPY exchange rate is 93.00, and you buy 20k. That means you go long 20,000 USD and go short 1.86 million JPY. Since you are long and short equivalent amounts of the two currencies, FXCM does not have to lend you any money to open this trade. However, since you are long USD and short JPY, you risk losing money if the USD/JPY exchange rate falls. Therefore in order to account for this risk, FXCM requires you to put up $50 as a deposit which is called Used Margin. As long as you can maintain this minimum margin requirement, you are allowed to keep your trade open.

That is why it is important to monitor your Usable Margin (Usbl Mr in the Accounts window). Your Usable Margin is what’s left of your Equity after you subtract your Used Margin. If your Usable Margin ever fell to zero due to trading losses, then the system would automatically close out all your open positions to prevent further losses. Take a look at the example Accounts and Open Positions windows below.

You can see that $50 Used Margin has been set aside for 20k in Open Positions. That leaves $1950.43 in Usable Margin. If Usable Margin falls to zero then the the system will automatically close out all Open Positions to prevent further losses. This system allows FXCM to offer a No Debit Balance Policy which means you can never lose more money that you have in your trading account. So this account could only lose $2000, even though there are 20k in Open Positions.

If you have any further questions about your FXCM account, feel free to ask me in the Broker Aid Station.

Jason

4

hi jason,

what % would you recommend as minimum usable margin which you wouldn’t cross?

5

If you go through this, you’ll see what’s set aside
Forex Money Management

6

thanks gp00053,

maybe i didn’t express myself exact enough…

i just wanted to ask with what % of remaining usable margin you are still comfortable?

e.g.: some might open/hold trades until usable margin % is down to 50%, others don’t want to wait so long and cut trades with usable margin 70%…that was basically my question…just curiosity what other traders think about this and if there are suggestions of until where it’s still “safe” to keep/open trades and where to stop opening more trades (like until 50% usable margin or more or less)…i personally wouldn’t feel too comfortable having only 50% or less left with open trades…

7

Hi Mike,

I will give you two answers: one for US traders, and one for non-US traders, since the CFTC has higher margin requirements for US residents.

Suppose you start with $10,000 equity in your account. Even though you have more leverage available, a recent DailyFX study into trader profitability has shown that you probably don’t want to exceed 10:1 effective leverage. That means with 10k in your account, you don’t want to trade more than 100k total across all your open positions.

If you live in the US like me, then a 100k USD/JPY position requires $2000 to be set aside as used margin. That leaves you with $8000 usable margin, or a usable margin percentage of 80% (8k divided by 10k). I try to risk no more than 2% on an individual trade, and no more than 20% in my account as a whole. That means I want my personal usable margin percentage cutoff to be about 60%. Below that, I would consider closing some positions or adding more funds to raise my usable margin.

If you live outside the US, then you can open an account with FXCM UK or FXCM Australia, where margin requirements are much less than what’s required in the US. A 100k USD/JPY position only requires $500 to be set aside as used margin. That leaves you with $9500 usable margin, or a usable margin percentage of 95% (9.5k divided by 10k). If you want your usable margin percentage cutoff to be after a 20% drawdown in your account, then that would be 75%.

So to summarize, since I have an FXCM US account, I try not to let my usable margin percentage drop below 60%. If I lived outside the US and had an account with either FXCM UK or FXCM Australia, I would try not to let my usable margin percentage drop below 75%. Again, these are just my own personal percentages. I know some more conservative traders who try not to let their usable magin percentage drop below 75% in the US or 90% in the UK and Australia.

There is actually a way to set margin alerts on your account, that can warn you when your usable margin percentage falls below a specified level. The warnings can be set to come as pop up messages on your platform or emails. To set up Margin Alerts on your charts, go to “Alerts and Trading Automation” > “New Strategy or Alert” > “MARGINALERT”.

In the “Strategy or Alert Parameters” window that pops up, you set the margin level when you want to receive warnings. If you live in the US, then you might also be interested in the post I made the other day about our new Smart Margin feature for FXCM US clients.

Jason

8

Only what’s in your account…not more. Just remember when you exceed the margin, you will reach the stop out level - the point where all open trades are closed automatically. Just make sure you have enough margin to keep the trades open. And the stop out level may vary from one broker to the next.

9

hi jason,

thanks for you information…it really helps me for fine-tuning my system…

10

My pleasure :22:

I think Risk Management is the single most important facet of trading. Everything else can be learned over time, but if you start off with poor risk management, then your equity will dwindle before you have a chance to develop your other trading skills like chart reading and interpreting economic data.

11

i’m also convinced that risk management is the most important factor of trading…and especially for my trading style, where at times i have quite a few trades open at the same time…that’s why i asked about your opinions about the remaining usable margin…i don’t want to blow my account…

12

What are your thoughts on the usable margin percentages I suggested? Are they similar to what you’ve already been using?

13

yes, basically i agree with your percentages…i even used more conservative percentages…
but now i trade a different system/method and this one may result in lower percentages…until now i only got to 85% remaining usable margin (notice that i’m a european trader with other margin requirements than US) in the worst case…

14

@Jason Rogers: How about if a huge gap forms when you have a position opened?
This could form in the week-end or if a war starts.
Then I can have a negative balance.
What will happen then? I will have to pay FXCM the money from the negative balance?

15

Ciao Francesco! Benvenuto. Jason Rogers answered questions on leverage on the Babypips FXCM forums: have you looked there? Try to post future questions to him in that forum - although he is nice enough to answer the same questions more than once!! Good luck.

16

Hi Pokkerface,

FXCM has a No Debit Balance Policy which means you can never owe us money due to trading losses.

When you use leverage, you’re trading a position size that’s larger than your account equity. You’re correct in your assessment that this could possibly lead to a negative balance if the market price gaps dramatically. Should that happen, however, FXCM would credit your account back to zero, so your risk is limited to the funds in your trading account.