Features of margin trading on Forex:
- Unlike other forms of lending, the trader does not pay interest for using a loan in the usual form. Each broker has a swap – a fee for transferring a position to the next day, which is charged on all open transactions, including those where credit funds are involved. And the swap is subtracted from the trader’s personal money, thereby accelerating the reduction of the deposit.
- Margin trading is in most cases short-term. A trader uses leverage only when he is fully confident that the trend will not reverse. Having made a profit on short-term positions, the trader returns to trading only with his money.
- The risks of the trader in most cases are limited to his deposit.
Clarification on the last point. A broker offering his money within one day does not risk anything, because, with a sharp turn in the price, he will have time to automatically close all trades of the trader. The situation is different with the transfer of transactions to the next day or in case of serious force majeure.
On January 15, 2015, the Central Bank of Switzerland released the national currency exchange rate “on the free flight”. In one night, the franc soared against the dollar and the euro by 30%.
The decision was unexpected for many. On the first day, due to the high volatility in the trading conditions, changes were made: someone suspended the auction completely, someone changed the security requirements. Almost all brokers incurred losses in transactions in the illiquid market, and for the British division of Alpari (UK), this story ended in bankruptcy. Official version: “Due to the volatility, the company did not have enough liquidity. Losses of clients exceeded the funds stored on deposits and the broker is forced to reimburse them at his own expense. ”
This situation is a prime example of the fact that there are exceptions to any rule.
How to avoid Margin Call and Stop Out:
- Read the offer, which contains detailed trading conditions for each account.
- Strictly observe the rules of risk management. The theory says that the amount of simultaneously opened transactions should be no more than 10% (in rare cases, 15%) of the deposit amount.
- Use the table as an example above.
- Be careful about leverage. Set a goal in terms of position volume, not trying to open the maximum possible deal.
- Estimate the ratio of leverage and volatility. The greater the volatility, the less leverage to use in margin trading.
- Establish stops.
You should not be afraid of leverage, any tool in the hands of a professional can make a profit. What leverage to choose – an individual choice of each and there are no single recommendations here. Strict adherence to risk management and control of unprofitable positions is one of the most effective methods to prevent a stop out. If you saw inaccuracies in the article or if you want to add something, I’m waiting for your comments!