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This is why profits and losses vary greatly in forex trading even though currency prices do not change all that much — certainly not like stocks. Stocks can double or triple in price, or fall to zero; currency never does. Because currency prices do not vary substantially, much lower margin requirements are less risky than it would be for stocks. Note, however, that there is considerable risk in forex trading, so you may be subject to margin calls when currency exchange rates change rapidly.

Such leverage ratios are still sometimes advertised by offshore brokers. However, in , US regulations limited the ratio to The purpose of restricting the leverage ratio is to limit the risk. The margin in a forex account is often called a performance bond , because it is not borrowed money but only the equity needed to ensure that you can cover your losses. In most forex transactions, nothing is bought or sold, only the agreements to buy or sell are exchanged, so borrowing is unnecessary.

Thus, no interest is charged for using leverage. Thus, buying or selling currency is like buying or selling futures rather than stocks.

What is FX Margin?

The margin requirement can be met not only with money, but also with profitable open positions. The equity in your account is the total amount of cash and the amount of unrealized profits in your open positions minus the losses in your open positions. Your total equity determines how much margin you have left, and if you have open positions, total equity will vary continuously as market prices change.

Instead of a margin call, the broker may simply close out your largest money-losing positions until the required margin has been restored. The leverage ratio is based on the notional value of the contract, using the value of the base currency, which is usually the domestic currency.

What is Free Margin?

Often, only the leverage is quoted, since the denominator of the leverage ratio is always 1. When you trade without margin, all transactions must be made with either available cash or long positions. So whenever you buy a position without margin, you must deposit the cash required to settle the trade, or sell an existing position on the same trading day.

The primary benefit of trading without margin is the decreased risk.

XM Margin Calculator

There are many benefits to trading with lower risk, not least of which being your own peace of mind. If stress and anxiety are problems for you, and taking a big financial hit would be very damaging to your life, then you may be better off trading without margin. Though the risks are greater, the potential gains associated with trading on margin are what makes it a good choice for many investors. Trading without margin is restrictive, and though you can make a success of it, you will likely be in for a much slower and longer journey to where you want to be.

One of the most important things to do when weighing up whether to trade with or without margin is to understand how much leverage will be available for a given margin. XM offer a great margin calculator across all currencies and forex pairs, Use it here. The exchange rate is the whole number, with no decimals. Leverage is the ratio that brokers will offer to you — but here we need to convert it to a percentage, or decimal. So would become 0. We will say the rate is 1. The leverage will be Secondly, lets use a broker that offer leverage:. The first part of the calculation is your overall exposure — the amount of currency you are buying in effect.

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Here is one last example:. We will say the exchange rate is So here, we need to put down far more capital than a major forex pair. Please always remember that trading in Forex and CFDs might not be suitable for all investors. It is desirable investors who would consider trading, to do so only with money that they can afford to lose. You are also recommended to seek independent financial advice if necessary.

The content on this website does not constitute financial or investment advice. Any information herein is of a general nature and does not take into consideration your personal circumstances, investment experience or current financial situation.

Margin Calculator

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