Forex Broker Margin Trading Tips
Forex Broker Margin Trading Tips
Forex Broker Margin is an agreement between a dealer and the Forex Broker. The dealer is obliged to provide the Forex Broker with trading credit equal to a predetermined percentage of the amount of money being traded in a given trade. The credit is given in the form of cash or by extension of credit. The dealer is entitled only to the amount of leverage (i.e. the higher the percentage of trading assets being held by the dealer, the greater the credit given to the dealer).
There are several factors which determine the level of the forex broker margin requirements. These factors include the type of trading account, the size of the trading account, the amount of money being traded and the time duration for which the trades are conducted. Another factor that determines the requirement is the type of margin requirement. For instance, an account which has a lower maximum percentage of leverage is of lower margin requirements.
There are two types of margined trading strategies, counter-trend and trending. In the counter-trend strategy, a position is held by a dealer for periods ranging from one to four days. On the other hand, in the trending strategy, a dealer holds a position for a shorter duration, usually one to three days. Leverage on the basis of percentage of trading assets is applied in the counter-trend strategy. In the trending strategy, leverage is applied on the basis of trading assets held in the margin account.
Another factor which determines the level of the margin requirements is the type of the base currency chosen for trading. Traders may choose the currency of their choice as the base currency for forex trading. In order to minimize the margin requirement, dealers may use a currency that is not widely used in the foreign exchange market. It may also help them to reduce the risk by choosing the currency of a lower value in the base currency.
Traders also need to determine the type of leverage applied when they open a trading account with a broker. When a higher level of leverage is used in the trading account, the risk of loss is increased. Such high levels of leverage may be needed for large cash positions or for the implementation of automated systems. Thus, traders should ensure that they have proper margin requirements before they open a trading account with a particular brokerage firm.
A trader’s margin requirements depend on whether they trade in the single currency or the multi-currencies. When a trader trades in the single currency, the margin requirements are generally lower than when traders trade in multi-currencies. The actual amount of the margin varies according to the size of the trade and the level of the foreign exchange broker.
When a trader executes a trade and the purchase price in the base currency is greater than the selling price in the base currency, the profit realized in the foreign exchange trade is taxable income. Hence, the trader needs to account for this profit when filing his or her income tax return. However, the trader can offset this tax payment by taking into account the difference between the selling and buying prices in the two currencies. The difference in the pip value is referred to as the “exchange margin”.
In case you re trading 100,000 base unit leveraged currency pairs, then you will be increasing your exposure to risk in relation to price movements. Therefore, you should try to minimize the risks arising from price movements by employing stop-loss orders. You should also use stop-loss orders when you are not able to obtain the desired exit point in case the price moves against your position within the defined limit. You can reduce your risk of loss through diversification of assets and liabilities. Your strategy should include the ability to protect against sudden price fluctuations. Forex broker margin trading requires a lot of research and regular monitoring so that you can avoid losing positions and improve your performance.
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