Forex Trading: Margin Usage and Introduction to Hedging
Here's an article that discusses the use of margin in currency trading, and limiting your margin use for each trade to a certain percentage of the total available margin. There are several different position sizing rules that can be used either alone or in combination (eg fixed percentage risk rule, fixed trade sizes etc). This is one of those guidelines. Here's the article:
A good rule of thumb for either a mini-account or standard forex account, is to limit your margin usage for each trade to 5% - 10% of your usable margin.
As an example, if your usable margin is $5000, to trade safely, limit your margin usage for each trade to a maximum of $250. This means trading only 1 full lot for each trade. This is assuming that you are trading in a CMS Universal account with 400:1 margin. Your use of margin is increased with a smaller ratio, as most other brokerages only offer a smaller ratio, normally 200:1 or even 100:1.
As your account grows and your usable margin grows, you can increase your margin usage and trade bigger mini or full lot sizes. If you lose money and your account shrinks, drop your margin usage back down to smaller sizes. You need to learn to keep your eye on your usable margin, especially if you’ve suffered some losses.
Protect your usable Margin by not having more than 2 open hedged or unhedged position at any one time. Your usable margin & equity will get eaten up by un-hedged open positions that go bad in the wrong direction...this is a really good reason why you want to use stops, and if you hedge, hedge tightly.
IMPORTANT: Don't just keep putting on positions because you think it's a good opportunity. First sell a position and book some usable margin before you put on another position.
NOTE: Hedging does not use up more margin! Use it to protect your equity & usable margin, esp. in an emergency situation!
If you break the hedging rules, and your positions go against you and you aren't properly hedged with stop losses, you'll quickly see your usable margin degrade.
If it degrades enough so that your usable margin goes into the negative, you'll get a margin call. This means that the operators will automatically start selling some of your lots in your oldest losing positions in order to beef up your usable margin. This makes your unrealized loss become a realized loss...and the money is gone from your account.
If you lose too much useable margin, they won't even let you trade in your account, the message they'll give you when you try to put on a new trade is, 'Account in Untradeable Condition'.
If this happens, you might have an open position that needs to be hedged immediately or you might need to sell an old position. Or you might need to deposit more money into your account. Then you can start trading smaller lots to win back some usable margin.
You can lose your entire account balance if you're not careful. One other good thing about forex trading is that you will never lose more money than is in your account, you won't have to sell your house if you get a margin call! Stick to the rules above and this won't happen to you. You'll make more money than you thought possible and without the stress of loss.
Cynthia Macy is co-author of ‘The Day Trade Forex System: The Ultimate Step-By-Step Guide To Online Currency Trading’.
Article Source: http://EzineArticles.com/?expert=Cynthia_Macy
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