Forex margin Question

[Hiero]

My question deals with margin in the Forex market, and is as follows:
How is margin requirement calculated for Forex?
Can you have a fixed dollar amount for the margin for one contract (like the futures market)?

Reason for question is because I am reading about fixed fractional and fixed ratio money management strategies and the author refers to contract positioning in futures trading.

Any help would be great!
-- Hiero

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	Margin The deposit required to open or maintain a position. Margin can be either "free" or "used". Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions. With a $1,000 margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional $100,000. This allows a trader to leverage his account by up to 100 times or a leverage ratio of 100:1. If a trader's account falls below the minimum amount required to maintain an open position, he will receive a "margin call" requiring him to either add more money into his or her account or to close the open position. Most brokers will automatically close a trade when the margin balance falls below the amount required to keep it open. The amount required to maintain an open position is dependent on the broker and could be 50% of the original margin required to open the trade.

[mwlapp]

Hope this helps

Calculating the usable margin (Usbl Mr) that will be available after placing a trade can be done by using some simple math. If an account has $1000 usable margin available and the trader has a 1% margin requirement and wishes to place a trade for 30K, the amount that is deposited into the used margin field after placing the trade can be figured by multiplying the trade size by the margin requirement ($30,000 x 1% = $300). This leaves the trader with $700 of gross usable margin ($1000 - $300 = $700). The next step is to subtract the spread from the gross usable margin to get the net usable margin. The EUR/USD is worth $1 per pip for every 10K contract. So a 30K contract would equal $3 per pip. If there is a 3pip spread then a 30K contract would cost $9 ($3 x 3pip spread = $9). Now take the original $700 gross usable margin and subtract the spread and there is $691 net usable margin ($700 - $9 = $691). Now to figure how many pips the market can move against the position to bring the net usable marigin to zero, take the net usable margin and divide it by the cost per pip ($691 / $3 = 230pips)

	Margin The deposit required to open or maintain a position. Margin can be either "free" or "used". Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions. With a $1,000 margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional $100,000. This allows a trader to leverage his account by up to 100 times or a leverage ratio of 100:1. If a trader's account falls below the minimum amount required to maintain an open position, he will receive a "margin call" requiring him to either add more money into his or her account or to close the open position. Most brokers will automatically close a trade when the margin balance falls below the amount required to keep it open. The amount required to maintain an open position is dependent on the broker and could be 50% of the original margin required to open the trade.

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[DrForex]

Originally Posted by Hiero

My question deals with margin in the Forex market, and is as follows:
How is margin requirement calculated for Forex?
Can you have a fixed dollar amount for the margin for one contract (like the futures market)?

Hiero,

While the first answer above spoke mainly about available margin, let me address the issue of margin requirement more directly.

Margin required is a straight-forward deal between a forex market maker and you the trader.

You are going to trade with currency lots of higher value than your capital, or margin. The market maker (or FX broker) wants a security deposit for this fact. They incur risks if they offset your transaction with a clearing house (other market maker). This market maker wants security from them.

The transaction between you and your broker is put forward by the broker to you. They simply say: "You, the trader, have to put down a small percentage of the value of the transaction you do."

In retail forex the norm is 1%, but you also get 0.5%, 0.25% and others such as 2% - 5%.

Like the previous answer explained you must calculate the margin required as a percentage of the lot / transaction value. (Not all brokers have fixed lot sizes. With some you can trade any transaction size from $1.00 up.

Your margin will always be the agreed percentage of the value of the transaction that you make.

If your margin account is denominated in USD your margin per transaction is calculated in USD. If you trade eurusd the value of the transaction in USD is the amount of euro X value of eurusd. This is somewhat confusing if you never looked at this before.

Retail forex brokers always quote the industry convention namely eurusd (i.e. eur in terms of usd). That means a 10K eurusd transaction = EUR10,000 and that is if eurusd value = 1.2000 = $12,000. Your 1% margin required will be 1% of $12,000 = $120.00.

The following is very important:

Too many traders approach "money management" from the point of view of margin required and not the full notional transactional value. This is a serious mistake (in my eyes). Let me explain to you why:

If you have 2 margin accounts at different brokers, the one has 1% margin requirement and the other 0.5%. Let's say you have $5,000. You trade fixed 10K lots.

Many traders say as part of "money management" that they will risk only say, 10% of their capital at any given time. What they mean is that they will do transactions to the value of 10% of their margin based on the margin requirement.

The problem with this approach is that margin required has absolutely ZERO to do with risk. Here is why:

Same trader, same size account, same money management technique, two brokers, different margin requirement:

Say broker A's requirement is 1%, Broker B = 0.5%.

Trader decides to do a maximum trade (for him, following his MM) (10% of margin) at both brokers.

Broker A = buy $5,000 X 10% = $500 = at 1% of 10K (lot size) = 5 lots. Notional transactional value = EUR 50,000 and value per pip $5.00.

Broker B = buy $5,000 X 10% = $500 = at 0.5% of 10K (lot size) = 10 lots. Notional transactional value = EUR 100,000 and value per pip $10.00.

Let's say the trade was not such a good idea. the eurusd moves 50 points in the wrong direction. With broker A he loses $250, with broker B, $500.

So, if he knows this and decides to address the matter by putting a "money management" stop on the higher leveraged transaction (Broker B) to exit the transaction at 25 pip loss, then he really starts cascading down the slippery slope of trading like a person bound on losing his money.

The solution is that you must calculate your risk not by using your margin required percentage but by looking at your leverage or gearing ratio:

I.e. Broker A = EUR50,000 (5 10K lots)/ $5,000 (total capital) = gearing of 10:1. I.e. you take your capital, wish wish it is EUR50,000 (for which you give the broker some measily security of 1%) and off you go. Risking not 10% of what you have but risking wat you have 10 times.

Broker B = EUR100,000 (5 10K lots)/ $5,000 (total capital) = gearing of 20:1. I.e. you take your capital, wish wish it is EUR100,000 (for which you give the broker some measily security of 0.5%) and off you go. Risking not 10% of what you have but risking wat you have 20 times.

Because margin required is a variable it can not be used to judge the risk where the other properties of the transaction are all fixed (non-variable): Margin = $5000, lot size = EUR10,000 and pip value = $1.00/ per 10K.

That is why you should look at the transaction from the notional value angle and not the variable margin requirement angle like most do.

I always say, you must know there must be reasons why the large majority lose and struggle. They basically do the same things. The above is one of them. If you want to change your fortunes in currency trading start doing things differently than the losers.

(The forex market does not revolve around your subjective ideas of MM, reading of indicators / charts, entry exit parameters and money / risk management. You are with all of these properties as part of your trading but a cork in the forex ocean.

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	Leverage Leverage is the ability to gear your account into a position greater than your total account margin. For instance, if a trader has $1,000 of margin in his account and he opens a $100,000 position, he leverages his account by 100 times, or 100:1. If he opens a $200,000 position with $1,000 of margin in his account, his leverage is 200 times, or 200:1. Increasing your leverage magnifies both gains and losses.<p>To calculate the leverage used, divide the total value of your open positions by the total margin balance in your account. For example, if you have $10,000 of margin in your account and you open one standard lot of USD/JPY (100,000 units of the base currency) for $100,000, your leverage ratio is 10:1 ($100,000 / $10,000). If you open one standard lot of EUR/USD for $150,000 (100,000 x EURUSD 1.5000) your leverage ratio is 15:1 ($150,000 / $10,000). For more on leverage, visit the following links: http://www.goforex.net/forex-leverage.htm http://www.goforex.net/forex-leverage-2.htm

	Market Maker A market maker provides pricing and liquidity for a particular currency pair and stands ready to buy or sell that currency at the quoted price. A market maker takes the opposite side of your trade and has the option of either holding that position or partially or fully offsetting it with other market participants, managing their aggregate exposure to their clients. If a market maker chooses to keep the trader's position without offsetting it in the market, the trader's profit is the market maker's loss and vice versa, leading to a possible conflict of interest between the trader and his market maker. A market maker earns their commission from the spread between the bid and offer price.

	Margin The deposit required to open or maintain a position. Margin can be either "free" or "used". Used margin is that amount which is being used to maintain an open position, whereas free margin is the amount available to open new positions. With a $1,000 margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional $100,000. This allows a trader to leverage his account by up to 100 times or a leverage ratio of 100:1. If a trader's account falls below the minimum amount required to maintain an open position, he will receive a "margin call" requiring him to either add more money into his or her account or to close the open position. Most brokers will automatically close a trade when the margin balance falls below the amount required to keep it open. The amount required to maintain an open position is dependent on the broker and could be 50% of the original margin required to open the trade.

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[Hiero]

Thank you both for your replies. I see I have much to learn.

-- Hiero

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