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rsearchi Fapturbo 1. Margin
Margin is the deposited funds held as collateral to cover any potential losses from adverse movements in prices. Margin requirement is set for each account and affects the number of units you can open and sustain.
Minimum margin requirement offered by MG Financial is 1%. Under the percentage based margin, the required margin for all accounts is a percentage of the numerical value of the Base Currency or the first currency in the pair. For example, 1% of 1 unit USD/JPY is $1,000 (1% x 100,000USD=1,000USD); 1% of 1 unit EUR/USD is $1,439(1% x 100,000EUR x1.4390 = $1,439).*
For details on margin calculation, please click here.
In theory, with $5000 account equity in your account to trade EUR/USD, you can trade a maximum of 3.4 units ($5000 / $1439 per unit = 3.4 units).*
* Calculated at the market rate of 1.4390 at the time of conversion
In reality, you are not able to trade 3.4 units. There are a few more factors you need to consider...
2. Spread
The spread of any currency pair is the difference between the Bid and Ask rate of the two currencies in the pair. For example, spread for EUR/USD with current Bid rate of 1.4387 and Ask rate of 1.4390 is 3. When a position enters the market, your position immediately reflects the revaluation of market value. Under flat market conditions, when entering the market your position may see a negative P/L equivalent to the spread of the currency pair you are trading.
3. Pip Value
The pip value of 1 standard unit (100,000) for either of the currency pairs of EUR/USD, GBP/USD, and AUD/USD is $10.
Calculation of Pip value of pairs with USD based currency or Crosses, such as USD/JPY, USD/CAD, or GBP/JPY is a bit more complicated. The Profit Loss Calculator is a useful tool to calculate profit or loss of a potential trade.
Pip value can be used to calculate how many pips of movement your usable margin can sustain. For example, if your usable margin is $200 and you have 1 unit EUR/USD, the account can sustain 20 pips of market movement against you.
4. Usable Margin
The usable margin is the amount remaining to place additional trades or amount to sustain market movement against your position. This value is calculated by taking your Account Equity less the Used Margin. Usable margin in simpler terms is the balance of your account less used margin and +/- Profit/Loss. Please remember that because Usable Margin takes into consideration Profit/Loss, this amount changes with market movement.
5. Possible Scenarios
Now let's try to answer the question...
Beginning Account Equity of $5000 and 1% Margin requirement**
** Calculated at the market rate of 1.4390 at the time of conversion
Scenario 1- Trade 1 unit EUR/USD
Usable Margin= $5000 (Beginning Account Equity) - $30 (3 pip spread x $10 per pip) - $1439 (Required margin for 1 unit) = $3531
$3531 (Usable Margin) / $10 (pip value for 1 unit EURUSD) = 353 pips
Your account can therefore sustain 353 pips of movement against you for 1 unit position.
Scenario 2- Trade 1.5 units EUR/USD
Usable Margin= $5000 (Beginning Account Equity) - $45 (3 pip spread x $10 per pip x 1.5 units) - $2158.5 ($1439 margin per unit x 1.5 units) = $2796.5
$2796.5 (Usable Margin) / $15 ($10 per pip x 1.5 units) = 186 pips movement
Your account can therefore sustain 186 pips of movement against you for a 1.5 unit position.
Scenario 3- Trade 0.1 unit EUR/USD
Usable Margin= $5000 (Beginning Account Equity) - $3 (3 pip spread x $10 per pip x 0.1 unit) - $143.9 ($1439 margin per unit x 0.1 units)= $4853.1
$4853.1 (Usable Margin) / $1 ($10 per pip x 0.1 unit) = $4853 pips
Your account can therefore sustain 4853 pips of movement against you for a 0.1 unit position.
Scenario 4- Trade 3 units EUR/USD
Usable Margin= $5000 (Beginning Account Equity) - $90 (3 pip spread x $10 per pip x 3 units) - $4317 ($1439 margin per unit x 3 units)= $593
$593 (Usable Margin) / $30 ($10 per pip x 3 units) = 19 pips
Your account can therefore sustain 19 pips of movement against you for a 3 unit position.
Scenario 5- Trade 0.5 units EUR/USD
Usable Margin= $5000 (Beginning Account Equity) - $15 (3 pip spread x $10 per pip x 0.5 units) - $719.5 ($1439 margin per unit x 0.5 units)= $4265.5
$4265.5 (Usable Margin) / $5 ($10 per pip x 0.5 units) = 853 pips
Your account can therefore sustain 853 pips of movement against you for a 0.5 unit position.
Client can also require margin greater than 1%, e.g. 2% or 3 %, and here is an example of trading 1 unit of EUR/USD at the market rate of 1.4390, with 2% margin requirement.
Scenario 6- Trade 1 unit EUR/USD with 2% margin requirement
Usable Margin= $5000 (Beginning Account Equity) - $30 (3 pip spread x $10 per pip) - $2878(2% x 100,000EUR x1.4390) = $2092
$2092 (Usable Margin) / $10 (pip value for 1 unit EURUSD) = 209 pips
Your account can therefore sustain 209 pips of movement against you for 1 unit position with 2% margin requirement.
From the various scenarios depicted above, you can see there is no definite answer to this question. This is highly dependent on the investor's appetite for risk. The investor must also take into consideration all relevant factors and make sure to keep enough usable margin in his/her account to sustain market movement.
The Explosion of the Euromarket
A major catalyst to the acceleration of Forex trading was the rapid development of the eurodollar market; where US dollars are deposited in banks outside the US. Similarly, Euromarkets are those where assets are deposited outside the currency of origin. The Eurodollar market first came into being in the 1950s when Russia’s oil revenue-- all in dollars -- was deposited outside the US in fear of being frozen by US regulators. That gave rise to a vast offshore pool of dollars outside the control of US authorities. The US government imposed laws to restrict dollar lending to foreigners. Euromarkets were particularly attractive because they had far less regulations and offered higher yields. From the late 1980s onwards, US companies began to borrow offshore, finding Euromarkets a beneficial center for holding excess liquidity, providing short-term loans and financing imports and exports.
London was, and remains the principal offshore market. In the 1980s, it became the key center in the Eurodollar market when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance. London’s convenient geographical location (operating during Asian and American markets) is also instrumental in preserving its dominance in the Euromarket.
The Gold Exchange and the Bretton Woods Agreement
In 1967, a Chicago bank refused a college professor by the name of Milton Friedman a loan in pound sterling because he had intended to use the funds to short the British currency. Friedman, who had perceived sterling to be priced too high against the dollar, wanted to sell the currency, then later buy it back to repay the bank after the currency declined, thus pocketing a quick profit. The bank’s refusal to grant the loan was due to the Bretton Woods Agreement, established twenty years earlier, which fixed national currencies against the dollar, and set the dollar at a rate of $35 per ounce of gold.
The Bretton Woods Agreement, set up in 1944, aimed at installing international monetary stability by preventing money from fleeing across nations, and restricting speculation in the world currencies. Prior to the Agreement, the gold exchange standard--prevailing between 1876 and World War I--dominated the international economic system. Under the gold exchange, currencies gained a new phase of stability as they were backed by the price of gold. It abolished the age-old practice used by kings and rulers of arbitrarily debasing money and triggering inflation.
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