Banks and/or online trading providers need collateral to ensure that the
investor can pay in the event of a loss. The collateral is called the “margin”
and is also known as minimum security in Forex markets. In practice, it is a
deposit to the trader's account that is intended to cover any currency trading
losses in the future.
Margin enables private investors to trade in markets that have high minimum
units of trading, by allowing traders to hold a much larger position than their
account value. Margin trading also enhances the rate of profit, but similarly
enhances the rate of loss, beyond that taken without leveraging.
Maintenance Margin
Most trading platforms require a “maintenance margin” be deposited by the
trader parallel to the margins deposited for actual trades. The main reason
for this is to ensure the necessary amount is available in the event of a “gap”
or “slippage” in rates. Maintenance margins are also used to cover
administrative costs.
When a trader sets a Stop-Loss rate, most market makers cannot guarantee
that the stop-loss will actually be used. For example, if the market for a
particular counter currency had a vertical fall from 1.1850 to 1.1900 between
the close and opening of the market, and the trader had a stop-loss of 1.1875,
at which rate would the deal be closed? No matter how the rate slippage is
accounted for, the trader would probably be required to add-up on his initial
margin to finalize the automatically closed transaction. The funds from the
maintenance margin might be used for this purpose.
Important note: Easy-Forex™ does NOT require that traders deposit a
maintenance margin. Easy-Forex™ guarantees the exact rate (Stop-Loss or
other) as pre-defined by the trader.
Leverage
Leveraged financing is a common practice in Forex trading, and allows traders
to use credit, such as a trade purchased on margin, to maximize returns.
Collateral for the loan/leverage in the margined account is provided by the
initial deposit. This can create the opportunity to control USD 100,000 for as
little as USD 1,000.
There are five ways private investors can trade in Forex, directly or
indirectly:
• The spot market
• Forwards and futures
• Options
• Contracts for difference
• Spread betting
Please note that this book focuses on the most common way of trading in the
Forex market, “Day-Trading” (related to “Spot”). Please refer to the glossary
for explanations of each of the five ways investors can trade in Forex.
A spot transaction
A spot transaction is a straightforward exchange of one currency for another.
The spot rate is the current market price, which is also called the “benchmark
price”. Spot transactions do not require immediate settlement, or payment
“on the spot”. The settlement date, or “value date” is the second business
day after the “deal date” (or “trade date”) on which the transaction is agreed
by the trader and market maker. The two-day period provides time to confirm
the agreement and to arrange the clearing and necessary debiting and
crediting of bank accounts in various international locations.
Risks
Although Forex trading can lead to very profitable results, there are
substantial risks involved: exchange rate risks, interest rate risks, credit risks
and event risks.
Approximately 80% of all currency transactions last a period of seven days or
less, with more than 40% lasting fewer than two days. Given the extremely
