What is margin?
Margin is the amount of money needed as a good faith deposit to open a position. Margin is not a fee or a transaction cost for trading but rather the amount of your account set aside and allocated as a margin deposit. GloCap Markets requires 1% margin on the notional value of client’s positions.
That translates to a leverage of 100:1. This means that for a 100,000 position a minimum margin of $1000 is required. Leverage, meaning using margin to trade a position of greater value, gives a trader the ability to increase the potential return on an investment. It is important to remember increasing leverage increases risk.
To minimize downside risk, monitor your account regularly and use stop-loss orders on every open position. Keep in mind that placing contingent orders may not necessarily limit your losses.
What is Notional Value?
The standard size of a position is 100,000 units of the base currency. For examples, with the currency cross USD/JPY a 100,000 position is equal to 100,000 USD, while 100,000 EUR/USD is equal to 100,000 EUR. Even though both contracts are for 100,000 they have different notional values and therefore different margin requirements.
Example #1
1. One Lot of USD/JPY = 100,000 USD;
2. At 1% margin = 100,000 USD x 0.01 = $1,000 USD required for margin
Example #2
1. One Lot of EUR/USD = 100,000 EUR;
2. Convert to USD (exchange rate = 1.3550) = 100,000 EUR x 1.3550 = 135,500 USD
3. At 1% margin = 135,500 USD x 0.01 = $1,355 USD required for margin
Why trade with lower leverage?
In the following example High Leverage Trader uses the full 100:1 leverage and enters a 1,000,000 position while Low Leverage Trader uses only 10:1 leverage and enters a 100,000 position. For example purposes we will assume $10 per pip. A 50 pip loss for High Leverage Trader leads to a loss of 50% of his account size while the same 50 pip loss for Low Leverage trader leads to a loss of only 5% of his account size.
|
High Leverage Trader |
Low leverage Trader |
| Account Equity |
$10,000 |
$10,000 |
| Notional Trade Size |
1,000,000 |
100,000 |
| Leverage Used |
100:1 |
10:1 |
| 50 pip loss in dollars |
$5,000 |
$500 |
| Percent loss of equity |
50% |
5% |
By using lower leverage, Low Leverage Trader significantly reduces the effects of the 50 pip loss on his account equity.