Forex trading margin




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Forex trading marginMargin Requirements

Forex and commodity trading is always conducted on margin. This means that a cash deposit, usually much smaller than the underlying value of the currency or commodity contract, is required in order to trade.

For example, a broker might require only $1,000 in the trader's account in order to trade a $100,000 currency position. The $1,000 is referred to as margin. This amount is essentially collateral to cover any losses that you might incur. Since nothing is actually being purchased or sold for delivery, the only requirement, and indeed the only real purpose for having funds in your account, is for sufficient margin.

Margin should reflect some rational assessment of potential risk in a position. For example, if a currency is very volatile, a higher margin requirement would normally be justified. One common rule of thumb is a worst-case one day move in the market. So if a $100,000 currency position is unlikely to move by more than 1% (or $1,000) in a 24 hour period, a $1,000 margin requirement is probably reasonable. If, however, the currency or commodity in question is highly volatile and is likely to move by, say, $3,000 or more (or 3%, as is often the case with certain NASDAQ stocks and some commodities) it would put the broker at increased credit risk to require only a $1,000 margin deposit.

Note that margin available in your trading account is based on account equity, not account balance. The equity is the most accurate measure of the value of your account, as it takes into account unrealized gains or losses.

With a GCI forex account, clients can never lose more than their deposited funds. Other brokers may have other policies with respect to satisfying margin requirements.