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Money Management In Forex Trading: Legal Considerations In Tennessee – Learn how margin is applied in forex trading, its benefits and risks, and why margin is one of the main reasons traders are drawn to the forex market.
Text on screen: Disclosure: Currency trading and margin trading involve high risks, and you can lose heavily.
Money Management In Forex Trading: Legal Considerations In Tennessee
Narrator: In this video, you will learn how margin works when trading currencies, the benefits and risks of trading on margin, and how it can affect your trades.
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Lot sizes vary depending on how much money an investor wants to spend on a job.
You have the ability to trade in standard lots and mini lots. A standard lot is 100,000 units of currency and mini lots are 10,000 units.
When you trade currencies, you are dealing in pips. A pip is a percentage of a point that spans four decimal places. This means you are usually dealing with 100ths of a penny. However, when trading yen (JPY), a pip only expands to the second decimal, 0.01.
Depending on the currency pair, 100ths of a penny with 100,000 units means that each pip is worth about $10.
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Narrator: For example, let’s say the exchange rate between the euro and the US dollar is a ratio of 1.4.
When you trade a lot in the forex market, you are placing a deposit in good faith called a performance bond but commonly known as margin.
If you are familiar with margin in stocks, margin in the forex market is not much different. When trading a stock, the margin requirement is the amount of capital needed to enter a position. The same is true for currencies. Margin in the forex market is simply the amount of capital you need to open a position in a currency pair.
Forex can be divided into two different categories: major pairs and minor pairs. Major pairs such as the US dollar, euro, and yen are more commonly traded and the margin requirement can be as low as 2%, resulting in a 50-to-1 leverage.
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This 50-to-1 leverage applies to certain major pairs, but minor pairs such as the Mexican peso, Singapore dollar and Hong Kong dollar are usually 20 to 1.
These ratios can change, so talk to the Forex Trading Desk to make sure you understand the leverage you’re dealing with.
Let’s return to our example, where 100, 000 euros equaled $140, 000. How much margin would you need to trade this pair?
Well, the 2% margin requirement is only 2% of the total unit value. Therefore, your margin requirement is $2,800.
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In pairs that do not include the US dollar, the total unit amount must be converted to US dollars.
Narrator: If you think about it, $2,800 is not a lot of money to control $140,000. This means that it wouldn’t take much for both of them to move against you and eat away at your initial margin.
Of course, the opposite is also true; a 90 pips decline could result in a loss of $900.
However, this is also why a lot less might be better. Small trading lots may be more suitable for your trading goals and risk tolerance.
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Although these forex trades can be rewarding, there is some risk due to the leverage. Therefore, you should always have a well-defined plan when dealing with a margin that determines a clear exit. This way, if a trade does not work as you expect, you can limit the losses.
There is a long-term trend towards currency diversification in global financial and trade transactions, but we don’t see the US dollar losing its dominance anytime soon.
This content is intended for informational purposes only and should not be considered a personalized recommendation or investment advice. Investors should review investment strategies for their own particular situations before making any investment decisions.
The examples provided are for illustrative purposes only and are not intended to match the results you may expect to achieve. Past performance does not indicate or guarantee future success. Returns will vary and all investments involve risks, including loss of principal.
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Margin trading increases your level of market risk. Your downside is not limited to the value of the collateral in your margin account. he may liquidate your account, without contacting you, to meet a margin call. may increase its “house” maintenance margin requirements at any time without prior written notice to you. You are not entitled to an extension of time on a margin call.
Forex trading involves leverage, carries a high level of risk, and is not suitable for all investors. Please read the booklet NFA Forex Trading: What Investors Need to Know before trading forex products.
Forex accounts do not receive any protection or guarantee from the Securities Investor Protection Corporation (SIPC), and do not receive priority in any bankruptcy proceeding pursuant to Part 190 of the CFTC regulations. Charles Futures and Forex LLC provides Forex trading services. Trading privileges are subject to review and approval. Not all clients will qualify. Forex accounts are not available to residents of Ohio or Arizona.
Charles Futures and Forex LLC do not make any investment recommendations and do not provide financial, tax or legal advice. Content and tools are provided for educational and informational purposes only. Any stock, options or futures symbols shown are for illustrative purposes only and are not intended to represent a recommendation to buy or sell a particular product.
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Charles Futures and Forex LLC, CFTC registered Futures Commission Merchant and NFA Forex Dealer Member. Charles Futures and Forex LLC is a subsidiary of The Charles Corporation. “Expert verified” means that our Financial Review Board has thoroughly assessed the article for accuracy and clarity. The Review Board is made up of a panel of financial experts whose objective is to ensure that our content is always objective and fair.
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