Trading off-exchange foreign currencies is a challenging and potentially profitable opportunity for educated and experienced investors. Before deciding to participate in the Forex market, you should carefully consider your investment objectives, level of experience and risk appetite. Most importantly, do not invest money you cannot afford to lose.
There are also risks associated with utilizing an internet-based deal execution software application including, but not limited to, the failure of hardware and software and communications difficulties.
The Forex Market is the largest and most liquid financial market in the world. Since macroeconomic forces are one of the main drivers of the value of currencies in the global economy, currencies tend to have the most identifiable trend patterns. Therefore, the Forex market is a very attractive market for active traders and presumably where they should be the most successful. However, success has been limited for some of the following reasons:
Many traders come with false expectations of the profit potential, and lack the discipline required for trading. Short-term trading is not an amateur's game and is not the way most people will achieve quick riches. Forex trading may seem exotic or less familiar than traditional markets (i.e. equities, futures, etc.), but the rules of finance and simple logic still apply. One cannot hope to make extraordinary gains without taking extraordinary risks, and that means potentially large losses. Trading currencies is not easy, and many traders with years of experience still incur periodic losses. One must realize that trading takes time to master and there are absolutely no shortcuts to this process.
Leverage
The most enticing aspect of trading Forex is the high degree of leverage available. MB Trading Futures, Inc. offers traders 50 to 1 margin leverage for all currency pairs. Leverage seems very attractive to those who are expecting to turn small amounts of money into large amounts in a short period of time. However, leverage is a double-edged sword. Just because one lot (10,000 units) of currency only requires $200 as a minimum margin deposit for US Dollar-based currencies (USD/JPY, for example), it does not mean that a trader with $2,000 in his account should trade 10 lots. Our technology allows a trader to trade sizes that he/she can afford at that moment, but using too much leverage in an account can be detrimental to success.
Margin Policy
MB Trading Futures, Inc. (MBTF) margin policies dictate that at any time a trader has an open position he/she must maintain a minimum of 2% equity. MBTF will make every effort to contact you in regard to risk positions. However, in some instances, if your account declines too quickly, the order desk will liquidate partial or entire open positions at risk to bring your margin equity percentage to 2%.
To determine the equity percentage calculation, we must first understand the requirements for US Dollar vs. non-US Dollar-based and exotic currency pairs. The margin requirement for each of these currency pairs is as follows:
USD-Based pair
The formula for a USD-Based pair like USD/JPY (Notice USD is the first Currency on the pair, hence “BASE pair”) is straight forward:
Ten lots of USD/JPY (100K units of USD) requires 2% margin so:
Formula $100,000 X 2%
$2,000 in Margin Required
Here is how that would look in MetaTrader 4’s Trade tab:
And here is how that would look in our Desktop or Desktop Pro software for your Account Balance:
Non-USD-based pair
With a non-USD-based pair like the EUR/USD, the formula becomes a little more complex. Now you will be trading in Euros, so ten lots will be 100k units of Euro. Therefore the formula changes to:
FORMULA 100,000 X (current price of EURO) X (2%)
EXAMPLE: EUR/USD currently trading at 1.4294
FORMULA 100,000 X (1.4294) X (2%)
$2,858.80 margin required.
The same formula is used for all other pairs that are not EUR based like the GBP/USD, AUD/USD etc. just multiply the current market price for that currency against the USD by the amount of units you are trading.
Here is how that would look in our Desktop or Desktop Pro software for your Account Balance:
And here is how it would look in MetaTrader 4’s trade tab:
Cross-Currency Pair
A cross pair is a currency pair that does not involve the USD such as the GBP/JPY. Here, margin requirement is determined by the base currency’s relationship to the US Dollar. In this case, the formula would be the same as the “Non-USD based pair,” since you will be trading in GBP all you need to do is convert the amount of units to GBP as follows:
100,000 X (current Price of GBP/USD) x 2%
EXAMPLE: GBP/JPY currently trading at 129.332. Notice that in this case what matters is the current price of the GBP/USD, not the pair you are trading.
FORMULA 100,000 X (1.5985) X (2%)
$3,197.48 margin required.
Here is how it would look in MetaTrader 4’s trade tab:
And here is how that would look in our Desktop or Desktop Pro software for your Account Balance:
Determining Margin Equity Percentage
Once you are able to determine the margin debit requirement for opening a position in a foreign currency, you then need to understand how to determine your margin equity percentage. When you open a position, based on the performance of that position, your account value will fluctuate. However, as long as you don’t add or open a new position, your margin debit requirement will remain the same. With this being said, refer to the following formula to determine your margin equity percentage, if there are no open positions within the account:
FORMULA Account Value / Margin Debit = Margin Equity Percentage
EXAMPLE: Account Value = $10,000 and you enter a trade in the GBP/USD using the above example at 1.5985.
FORMULA $10,000 / 3,197.48 = 312.74%
How can I determine if I am going to receive a margin call?
The above example conveys that our account is far from being in a margin call situation, since a margin call will occur when your account drops below 100% Margin Equity Percentage. To determine the account value which would generate a margin call liquidation, look at the following example:
FORMULA Account value LESS THAN (<) Margin Required
EXAMPLE: Account Value at $10,000 when you enter a 3 lot trade (300k units) in the GBP/USD using the above example at 1.5985. Therefore, your margin required is $9,592.44 but, unfortunately, the trade immediately goes against you 36 pips, which causes your account value to drop to $8,924.25. This means that your Margin equity percentage dropped to 99% which would trigger a margin call and your trade would be closed to bring your margin equity percentage above 100%.
NOTE: MT4 software will automatically liquidate your biggest loosing position to get your margin over the 100% level to keep your positions open. In Desktop Pro the process is not automated and the positions will be closed by our trade desk to bring your margin level above the required 100%.
Where would I see this on my platform? MT4 VS Desktop Pro.
Desktop and Desktop Pro will show your margin level on the “Account Balances” window—it will read as “percent equity.”
To access this window in Desktop Pro go to FILE menu, select NEW, and click on “Account Balances” from the drop down menu.
In MetaTrader 4 you will find this information in the “Terminal” window under the “Trade” tab next to your current balance and it will read as “Margin Level.”
You can open this window by clicking “Ctrl+T”
We understand that these concepts are extremely important to properly manage your risk. Please read the following paragraph carefully:
There is considerable exposure to risk in any foreign currency exchange transaction. Any transaction involving currencies involves risks including, but not limited to, the potential for changing political and/or economic conditions that may substantially affect the price or liquidity of a currency. Moreover, the leveraged nature of Forex trading means that any market movement will have an effect on your deposited funds proportionally equal to the leverage factor. This may work against you, as well as for you. The possibility exists that you could sustain a total loss of initial margin funds and be required to deposit additional funds to maintain your position. If you fail to meet any margin call within the time prescribed, your position will be liquidated and you will be responsible for any resulting losses. Investors may lower their exposure to risk by employing risk-reducing strategies such as ‘stop-loss’ or ‘limit’ orders
So what does this all mean to me?
Prior to opening a currency position, you need to determine if you first can afford the trade. Once you determine the Margin Debit value, you can use our formula to determine at what account value a margin call will incur. In initiating this formula, you may want to set a conservative rule that if your account drops within range of 1%, then you are going to wire more funds to your account to sustain the open account risk. Lastly, when you see that your account value is equal to the value of your margin debit, you can assume that at that time your account equity percentage is in excess of 100%.
MB Trading Futures, Inc. cannot stress enough the importance of understanding the risks of trading foreign currencies and how important it is to be able to properly manage your account and associated margin risk. In addition, we suggest that you also refer to the NFA’s publication “Trading in the retail Off-Exchange Foreign Currency Market – What Investors Need to Know” to fully understand all risks associated in trading off-exchange Forex products. If you have any questions please feel free to contact our support staff at 1-866-558-3342.
Margin leverage is 50:1
The margin requirement on a $100,000 contract is 2%
$100,000 is equivalent to 10 lots
Account value must be above $100 to open a new Forex position.
USD based pairs (USD/JPY)
$100,000 has a $2,000 margin requirement.
Non USD based pairs (EUR/USD)
Current price x 2%
The base currency price (EUR) is 1.2928, giving it a $2585.60 margin
Non USD related pairs (EUR/JPY)
If the pair does not contain USD, you must refer back to USD. Example: EUR/JPY would refer to EUR/USD (because it starts with EUR). So a $100,000 lot would have a margin requirement of $2585.60
If the equity in an account falls below the required margin, your account may be subject to liquidation to meet minimum margin requirements, inclusive of all open positions.
