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| UNDERSTANDING MARGIN |
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| Trading currencies on margin lets you increase your buying power. Here's a
simplified example: If you have $1,000 cash in a margin account that allows
100:1 leverage, you could purchase up to $100,000 worth of
currency-because you only have to post 1% of the purchase price as
collateral. Another way of saying this is that you have $100,000 in buying
power*.(*Increasing leverage may increase potential gains as well as losses
on any given trade). |
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| Benefits of Margin |
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| With more buying power, you can increase your total return on investment
with less cash outlay. To be sure, trading on margin magnifies your profits
AND your losses.
Here's a hypothetical example that demonstrates the upside of trading on
margin: With a US$5,000 balance in your margin account, you decide that the
US Dollar (USD) is undervalued against the Swiss Franc (CHF).
To execute this strategy, you must buy Dollars (simultaneously selling
Francs), and then wait for the exchange rate to rise.
The current bid/ask price for USD/CHF is 1.2122/1.2127 (meaning you can
buy $1 US for 1.2127 Swiss Francs or sell $1 US for 1.2122)
Your available leverage is 100:1 or 1%. You execute the trade, buying a one
lot: buying 100,000 US dollars and selling 121,270 Swiss Francs.
At 100:1 leverage, your initial margin deposit for this trade is $1,000. Your
account balance is now $4000.
As you expected, USD/CHF rises to 1.2170/75. You can now sell $1 US for
1.2170 Francs or buy $1 US for 1.2175 Francs. Since you're long dollars (and
are short francs), you must now sell dollars and buy back the francs to realize
any profit.
You close out the position, selling one lot (selling 100,000 US dollar and
receiving 121,700 CHF) Since you originally sold (paid) 121,270 CHF, your
profit is 430 CHF.
To calculate your P&L in terms of US dollars, simply divide 440 by the current
USD/CHF rate of 1.2170. Your profit on this trade is $361.54.However, if the
market had moved the same number of pips in the opposite direction, you
would have lost the same amount of money.
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| SUMMARY |
| Initial Investment: $1000 |
| Profit : $353.32 |
| Return on investment: 35.3% |
| If you had executed this trade without using leverage, your return on
investment would be less than 1%**.(**Forex trading involves a substantial
risk of loss. Please note that increasing leverage may increase potential
gains as well as losses on any given trade.) |
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| HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT
LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO
REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS
LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN
FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN
HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS
SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
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| ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS
IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF
HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE
FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN
COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL
TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR
ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING
LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT
ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS
RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION
OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY
ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL
PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT
ACTUAL TRADING RESULTS.
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