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Margin Requirements
Forex and commodity
trading is always conducted on "margin". This means that a cash
deposit, usually much smaller than the underlying value of the currency or
commodity contract, is required in order to trade.
For
example, a broker might require only $1,000 in the trader's account in
order to trade a $100,000 currency position. The $1,000 is referred
to as "margin". This amount is essentially collateral to cover any losses
that you might incur. Since nothing is actually being purchased or
sold for delivery, the only requirement, and indeed the only real purpose
for having funds in your account, is for sufficient margin.
Margin should reflect some rational assessment of potential risk in a
position. For example, if a currency is very volatile, a higher
margin requirement would normally be justified. One common rule of
thumb is a worst-case one day move in the market. So if a $100,000
currency position is unlikely to move by more than 1% (or $1,000) in a 24
hour period, a $1,000 margin requirement is probably reasonable. If,
however, the currency or commodity in question is highly volatile and is
likely to move by, say, $3,000 or more (or 3%, as is often the case with
certain NASDAQ stocks and some commodities) it would put the broker at
increased credit risk to require only a $1,000 margin deposit.
Note that margin available in your trading account is based on account
equity, not account balance. The equity is the most accurate measure
of the value of your account, as it takes into account unrealized gains or
losses.
With a GCI forex account, clients can never lose more than their deposited
funds. Other brokers may have other policies with respect to
satisfying margin requirements.
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