An Intern Learns – Getting Stuck In – Margin and Leverage
In my last blog post we delved into some forex nitty gritty! We explored fundamental FX terminology and were getting closer to what actual currency trading is all about. Personally I am becoming increasingly interested…
As such, I recently opened a MahiFX demo account and am now getting my first real taste of what Forex trading actually entails, albeit with virtual as opposed to real money. So far, so good. The MahiFX platform is very intuitive and with a little guidance from a colleague I was on my way. It’s exciting watching your order floating about on the charts! I’ve done quite a bit of research into the forex market, the underlying mechanisms and the top trading strategies employed by traders. I’ve had to start at the bottom rung of the ladder and I’m slowly beginning to understand more.
One tip that I’ve read numerous times is how important it is for new traders to first open a demo account, especially if you are new to forex, as I am. There are numerous benefits to opening a demo, or practice, account. The main advantage being that one trades with virtual, as opposed to real money. In this way you are able to deploy various trading strategies without the stress that market movements or trading mistakes could result in unexpected losses. A demo account is designed to familiarise you with the platform and test out all the features, as well as fine-tune your trading skills before you trade for real. I need to disclose here that MahiFX employees (and interns!) are permitted to have demo accounts, but not live ones.
Make sure that you treat trading as if it was your money and make calculated orders based on a strategy that you would genuinely consider implementing. In this way you can consider how well your knowledge weighs up against the market and whether you are ready to handle the reality and accompanying emotion of watching the markets go up and down.
Additionally, it’s imperative to have as much knowledge as possible. While I was getting my first order underway, I noticed that when you place an order, you are able to place a trade for a greater amount than what you actually invest. This is due to leverage. Leveraging – and a related concept, margin – are both fundamental terms I’d like to explain here.
The margin is the collateral required as safety in your account in case you experiences trading losses. It is calculated as a percentage of the total value of a transaction. An interesting fact I picked up is that MahiFX is unique in the fact that they implement cross-margining, which effectively means less margin is required and therefore more can be put into the actual trade. In basic terms, cross-margining works as follows: MahiFX calculate your cash flows across all your trades and calculate the margin based on their difference rather than the total.
Leverage is also an important concept. Leverage is a ratio based on the margin requirements. In MahiFX’s case, 1% is required per currency (1% is for a specific group made up mostly of the major currencies, and 5% for the rest) and as there are two currencies in the pair, there is 2% leverage. This means that you must have 2% of the total value of an expected trade before you make an order. 2% expressed as a ratio is 50:1. The reason why leverage is used is that most changes in the forex market are quite small and leveraging allows you to amplify your profits more quickly. But beware, this can also mean quicker losses.
FX platforms differ in terms of permitted leverage levels. MahiFX offers a leverage level of 50:1. Some trading platforms do allow investors to leverage trades at up to 200:1 – but traders should be aware that such heightened levels can result in both significant profits and losses. . . .
Now when it came to the point where I actually wanted to make a trade, I really began to think about what I was specifically trying to achieve. I was trading GBP/USD and began wondering, “Ok so in this 6 hour chart view – the coloured zigzaggy thing, after a couple ups and downs, is going in a generally upward movement – this means the Pound is strengthening against the US Dollar… now what do I do?!” In a moment of confusion I decided to check my facts again. When in doubt, go back to basics. In my last blog I discussed currency pairs, in this case I was dealing with GBP USD. The GBP is the base currency and the USD is the counter currency. When we decide to make a trade, we always do this with regard to the currency pair as a whole. From this, buying and selling is always done in light of the base currency, i.e. if we decide to ‘buy’ we are buying GBP in this case or conversely if we ‘sell’ we are selling GBP. In my case here I’ve decided to sell GBP.
Well! Let’s see what happens… I have discussed in previous blogs how handy a ‘stop loss’ and ‘take profit’ order can be. In my case I’ve put these in so that my amateurish trading is immediately stopped if the losses go beyond a certain point. Nothing left to do but be patient and see what happens.