Margin Calls
When your account has leverage, the total dollar value of the
currency you control is much larger than the value of your
account. For example, if you have an account that is leveraged
200:1, a $1,000 balance controls $200,000 worth of currency.
Your account is worth 1/200, or one-half of a percent, of the
contract you control. That means that if the underlying
currency moves by 0.5 percent and you are on the wrong
side of the move, your account value will go down to zero.
Conversely, if you are on the right side of the move and the currency
moves to the same degree, your account value will double.
It is a double-edged sword. If your account value falls to
zero, the broker or dealer will try to close out your position to
avoid a debit balance. In other financial markets the practice
has been for the broker to make a call to the customer to see
if the customer would like to put up extra margin to stay in
his or her position, hoping that things will turn around. Our
philosophy on margins calls is “never answer a margin call,”
and with most forex brokers you don’t have a choice. They try
to close your position out for you before the account goes into
debit. If they do not close it out in time, however, you will incur
the debt.
Minimizing Risk
We talk in greater detail about minimizing risk in the section on
money management. Before you get started, though, there are
some basic rules about risk that you need to know and observe:
Margin Calls
When your account has leverage, the total dollar value of the
currency you control is much larger than the value of your
account. For example, if you have an account that is leveraged
200:1, a $1,000 balance controls $200,000 worth of currency.
Your account is worth 1/200, or one-half of a percent, of the
contract you control. That means that if the underlying
currency moves by 0.5 percent and you are on the wrong
side of the move, your account value will go down to zero.
Conversely, if you are on the right side of the move and the currency
moves to the same degree, your account value will double.
It is a double-edged sword. If your account value falls to
zero, the broker or dealer will try to close out your position to
avoid a debit balance. In other financial markets the practice
has been for the broker to make a call to the customer to see
if the customer would like to put up extra margin to stay in
his or her position, hoping that things will turn around. Our
philosophy on margins calls is “never answer a margin call,”
and with most forex brokers you don’t have a choice. They try
to close your position out for you before the account goes into
debit. If they do not close it out in time, however, you will incur
the debt.
Minimizing Risk
We talk in greater detail about minimizing risk in the section on
money management. Before you get started, though, there are
some basic rules about risk that you need to know and observe:
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