ForEx (Marginal Trading)

Millennium Glory International

- As an information provider, we aim to educate the investing public regarding the profitability of Spot Currency Trading

- We aim to provide out technical expertise to “properly educate” individuals or clients engaged in spot currency trading

- We provide clients with leading edge products and services

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WHAT IS MARGIN TRADING?

In the world of forex, margin trading ( or buying / selling on margin ) means trading with short-term borrowed capital. Margin is thus a form of borrowed capital or debt. This borrowed capital is used to buy much more currency that you’d be able to purchase or sell ordinarily.

In the forex market, currencies are usually traded in LOTS, with a standard lot being $100,000. ( The forex market is a highly leveraged market). The term “lot” refers to the minimum amount of currency that must be bought or sold. To achieve this amount of currency, brokers offer a margin trading option. This means that through your margin account, you can execute deals with a small amount of initial capital. You can open $100,000 positions with as little as $1,000 capital or margin per lot.

Let’s take an example of margin trading:

You opened a $10,000 standard account ( for trading in the forex market ) with a broker.
Some market indicators are telling you that the Euro will strengthen against the US Dollar.
You believe it’s the right time to buy EUR/USD and you open a position to buy Euro ( 1 lot worth $100,000 with a 1% margin ) at the price of 1.3550 believing that the rate will rise. This means that you are holding $100,000 worth of euros with an initial deposit of $1,000.
The price does rise and reaches 1.3667.
You decide to sell and close your position. You have profited $570 ( 57 pips x $10 per pip or .0057 x $100,000 ), which constitutes a 50% return on your initial capital investment of $1,000 as you have to pay a broker’s fee of US$70 per lot to PT. Millennium Penata Futures.
You now have $10,500 in you account.

Also, brokers use this forex margin as collateral to cover any losses incurred by the trader. Since in margin trading, nothing is actually sold or bought for delivery ( no physical exchange of money ), the funds in your account serve as margin requirements. Therefore, we advise traders in the forex industry to start trading with HIGHER forex margin or capital to MINIMIZE the amount of risk involved in the transactions.

HOW ARE MARGIN AND LEVERAGE CONNECTED?

In forex trading, you use margin to create leverage. In other words, leverage is the process by which you invest the margin to make bigger profits. Leverage options are expressed either in terms of leverage ratio ( for example: 100:1 ) or in terms of margin percentage ( for example: 1.0% ).

Leverage and margin are connected according to this simple relationship.

Margin Percentage = 100 / leverage

Leverage = 100 / margin percentage

For example, a Broker offers a 100:1 leverage. What is the corresponding margin percentage? According to the ratio above, the margin percentage is 100/100= 1.0%

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Full Margin Trading vs. Margin Trading

Client A bought with Citibank one (1) lot of Japanese yen @ 115.20

Citibank will charge client a the full margin / market value of his transaction computer as follows:

(Rate/100)(Contract Size)

(115.20/100)($100,000)

= $115,200.00 cash out

Profit with Citibank

=(Sell rate – Buying rate) (CS) / 100

=(120.00 – 115.20)($100,000.00) / 100

= $4,800.00

Simultaneously, Client A also bought with Millennium Penata Futures. One (1) lot of Japanese Yen @ 115.20