What is Margin Trading?

Margin trading currencies lets you increase your buying power. Here's a simplified example: If you have $2,000 cash in a Margin trading account that allows 100:1 leverage, you could purchase up to $200,000 worth of currency, because you only have to post 1% of the purchase price as collateral. Another way of saying this is that you have $200,000 in buying power.

Benefits of Margin Trading

With more buying power, you can increase your total return on investment with less cash outlay. However, you can also increase your total LOSS on investment. Margin trading magnifies your profits AND your losses.

Here's a hypothetical example that demonstrates the upside of margin trading:

With a USD $5,000 balance in your margin trading account, you decide that the US Dollar (USD) is undervalued against the Swiss Franc (CHF).

To execute this strategy, you must buy Dollars (simultaneously selling Francs), and then wait for the exchange rate to rise.

The current bid/ask price for USD/CHF is 1.2322/1.2327 (meaning you can buy $1 US for 1.2327 Swiss Francs or sell $1 US for 1.2322 francs)

Your available leverage is 100:1 or 1%. You execute the trade, buying a one lot: buying 100,000 US dollars and selling 123,270 Swiss Francs.

At 100:1 leverage, your initial margin trading deposit for this trade is $1,000.

Your account balance is now $4000.

As you expected, USD/CHF rises to 1.2415/20.

You can now sell $1 US for 1.2415 Francs or buy $1 US for 1.2420 Francs. Since you're long dollars (and are short francs), you must now sell dollars and buy back the francs to realize any profit.

You close out the position, selling one lot (selling 100,000 US dollars and receiving 124,150 CHF) Since you originally sold (paid) 123,270 CHF, your profit is 880 CHF.

To calculate your P&L in terms of US dollars, simply divide 880 by the current USD/CHF rate of 1.2415. Your profit on this trade is $708.80

MARGIN TRADING SUMMARY

If you had executed this trade without using leverage, your return on investment would be less than 1%.

Here's a hypothetical example that demonstrates the DOWNSIDE of margin trading:

With a USD $5,000 balance in your margin trading account, you decide that the US Dollar (USD) is overvalued against the Swiss Franc (CHF).

To execute this strategy, you must sell Dollars (simultaneously buying Francs), and then wait for the exchange rate to fall.

The current bid/ask price for USD/CHF is 1.2322/1.2327 (meaning you can buy $1 US for 1.2327 Swiss Francs or sell $1 US for 1.2322 francs)

Your available leverage is 100:1 or 1%. You execute the trade, selling a one lot: selling 100,000 US dollars and buying 123,220 Swiss Francs.

At 100:1 leverage, your initial margin trading deposit for this trade is $1,000.

Your account balance is now $4000.

Unexpectedly, USD/CHF rises to 1.2415/20. You can now sell $1 US for 1.2415 Francs or buy $1 US for 1.2420 Francs. Since you're short dollars (and are long francs), you must now buy dollars and sell back the francs to realize any profit.

You close out the position, buying one lot (buying 100,000 US dollars and losing 124,150 CHF) Since you originally bought (paid) 123,220 CHF, your loss is 880 CHF.

To calculate your P&L in terms of US dollars, simply divide 880 by the current USD/CHF rate of 1.2415. Your LOSS on this trade is $708.80

MARGIN TRADING SUMMARY

If you had executed this trade without using leverage, your return on investment would be less than -1%.

Managing a Margin Trading Account

Margin trading can be a profitable investment strategy, but it's important that you take the time to understand the risks.

• You should make sure you fully understand how your margin trading account works. Be sure to read the margin trading agreement between you and your clearing firm. Talk to your account representative if you have any questions.
• The positions in your account could be partially or totally liquidated should the available margin in your account fall below a predetermined threshold.
• You may not receive a margin trading call before your positions are liquidated.
• You should monitor your margin trading balance on a regular basis and utilize stop-loss orders on every open position to limit downside risk.