Lessons

Margin Trade

What is margin trading? In literal translation, "margin" means a difference, a reserve. In this sense, margin trading is trade based on a guarantee amount provided by the customer (which serves as a guarantee and is in its trading account). Margin is measured as a percentage of the transaction value: for example, 1% margin at … Continue reading Margin Trade
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What is margin trading?

In literal translation, “margin” means a difference, a reserve. In this sense, margin trading is trade based on a guarantee amount provided by the customer (which serves as a guarantee and is in its trading account). Margin is measured as a percentage of the transaction value: for example, 1% margin at $ 1000 is $ 10.
How do I trade on a margin?
On margin you can trade forex, precious metals; CFDs on stocks, stock indices, futures or other assets. The key factor in margin trading is that if, for example, you want to buy 100 shares of Coca-Cola (KO), if the price per share is $ 42.60, you do not have to have the full amount of $ 4260, which is required as a guarantee amount – for example 5%, or $ 213.
Example 1: Trading in shares
For example, if the required margin is 5%, that means you must have $ 5 in your account to buy $ 100 worth of shares. When you make a deal, the following changes occur in your account:
Let’s assume you have $ 1,000 and want to buy 100 Coca-Cola shares. The price per share is $ 42.60, which means the transaction value is $ 4260. If the required margin is 5%, then the amount you need for the deal is $ 213 (4260 x 5%). This means that this amount remains blocked in your account and the remaining $ 787 available for trading.
If the price per share rises from $ 1.40 to $ 44, you will earn $ 140. This $ 140 is added to your account and you already have $ 1140 available, with the blocked funds being $ 220 (100 x $ 44 x 5%) and the free $ 920.
In this case, you have two options:
Sell ​​your shares at the current market price of $ 44 and your account balance will remain $ 1140
or keep your shares in anticipation of a more favorable price (such as a raise of up to $ 45 – which will bring you an extra profit of $ 100, taking the risk of falling prices).
If the price per share instead of rising by $ 1.40 will fall by $ 1.60 to $ 41.00, then you will lose $ 160. This $ 160 will be reflected in your account balance, which will now be $ 840. Blocked funds will be $ 205 (100 x $ 41.00 x 5%) and $ 635 free.
In this case, you have two options:
Sell ​​your shares at the current market price of $ 41 in order to minimize future higher losses – and the balance on your account will remain $ 840
or keep your stocks in anticipation of a more favorable price, taking the risk of an even greater drop in the price.
Example 2: currency trading
Let’s assume that the required margin is 1% and your account balance is $ 1000. The currencies are traded in lots, with 1 lot in the Delta Trading platform equal to 1000 units of the base currency. So if you want to buy 20 GBP / USD, or £ 20,000 at a market price of 1.2450, you need $ 249.00 as a margin (£ 20,000 x 1.2450 x 1% = $ 249.00). The balance of $ 751.00 is free to trade with other financial instruments.
If the market rate rises to GBP / USD / BGN 1.2500, you will earn $ 100, which adds to your account and gives you a balance of $ 1100. Therefore, the position maintenance margin will become $ 250.00 (£ 20,000 x 1.2500 x 1%), and the available funds on the account will be $ 850.00 ($ 1100.00 – $ 250.00).
In this case, you have two options:
Close the position at the current GBP / USD 1.2500 exchange rate and increase your balance to $ 1100
or keep the position open, pending a more favorable rate (such as raising the dollar to GBP / USD 1.2550 where you will earn a total profit of $ 200, but taking the risk of falling prices).
If the pound, instead of rising, drops to GBP / USD 1.2400, you will lose $ 100 to be credited to your account. Therefore, margin blocked funds will be $ 248.00 (£ 20,000 x 1.2400 x 1%), and the free funds – $ 752.00, giving you a $ 900.00 account balance.
In this case, you have two options:
Close your position at the current market rate of 1.2400 in order to minimize future higher losses – and the balance on your account to remain $ 900.00
or keep your position open, waiting for a more favorable price, taking the risk of an even deeper decline in the GBP / USD exchange rate.
Example 3: Trade in indices
Let’s assume that the required margin is 1% and you have $ 2000 available on your account. You want to buy a CFD on 1 US30 at a market price of $ 18 170. To run the deal, you need a margin of $ 181.70. The $ 1818.30 balance is free funds that you can trade with other financial instruments. If the market price rises to $ 18,500, the $ 330 profit will be added to your account. The blocked amount will grow to $ 185 ($ 18,500 x 1%), and the total balance will be $ 2330 – of which free funds will be $ 2145.
In this case, you have two options:
Sell ​​CFD on the index at a market price of $ 18,500 and make a profit of $ 330 to be added to your current account balance,
or hold the position in anticipation of a rise in price (such as a raise to $ 18,650, making another $ 150 profit, but taking the risk of falling in the base index).
If the market price of the index, instead of rising, drops to 18,000, you will lose $ 170, which will be deducted from your account. Margin funds blocked will become $ 180 ($ 18,000 x 1%) and free funds will decrease to $ 1,650, leaving you with a $ 1830 account balance.
In this case, you have two options:
Sell ​​CFDs on the index at the current market price of $ 18,000 to minimize future higher losses – and the balance on your account to remain $ 1830,
or keep your position open in anticipation of a more favorable price, taking the risk of an even greater drop in price.
Positions
Position is a financial commitment to a particular financial instrument.
It can be considered in different ways:
– speculative or hedging: Speculative is the position in which you enter with the expectation of making significant profits, taking into account the risk of losing most or all of the investment. The position is hedged when there is no or minimized exposure to risk factors. The purpose of opening the hedging position is to offset the impact of unfavorable movements in the prices of an asset on another item.
– long or short: A long position means buying a certain financial instrument in anticipation of raising its price. A short position means the sale of a particular financial instrument, pending its price down.
– winning or losing
Sell ​​- short, buy – long
When you buy a financial instrument, your position is called “debt”. Long positions are formed at the “sell” price. Therefore, when you buy 1 GBP / USD lot with 1.3280 / 83 quote, you buy GBP 1,000 at a price of 1.3283 USD.
When you sell a financial instrument, your position is “short”. Short positions are formed at the “buy” price, which in this case is 1.3280 USD.
Because of symmetric currency transactions, you are both in a long position in one currency and in a short position in the other. For example, if you want to exchange GBP 100,000 in USD, you are in a short position in British pounds and in debt in US dollars.
Close position
An open position exists when you have a claim or an obligation on a financial instrument. The value of the position will change depending on the market movement. Any potential profit or loss will be reflected in your trading account.
When closing a position, you make a counter deal with the same financial instrument. For example, if you are in a long position on 1 GBP / USD lot, open at “sell” price, you can close the position by selling 1 GBP / USD lot at buy price.
Bet on the market
Let’s suppose you start trading at a GBP / USD 1.3280 / 83 market rate.
You expect the British pound to rise against the US dollar and so you buy GBP 100,000 at a price of 1.3283 USD.
The transaction value is 100,000 x 1.3283 USD = 132,830 USD.
GBP / USD respectively rises to 1.3300 / 03 – and you decide to close your position by selling the British pounds for US dollars. Your profit is: 100,000 X (1.3300 – 1.3283) USD = 170 USD. Your profit is:
100,000 X (1.3300 – 1.3283) USD = 170 USD
You earn $ 170 per move from less than 1%. This illustrates the positive effect of margin trading.
On the other hand, if the GBP / USD drops to 1.3250 / 53, your loss will be:
100,000 x (1.3250 – 1.3283) USD = – $ 330
The conclusion is that margining may increase the amount of both potential profit and loss.
Pledge of market down
Let’s suppose you start trading at a GBP / USD 1.3280 / 83 market rate.
You expect that the British pound will fall against the US dollar and therefore you decide to sell GBP 100,000 / USD at a price of 1.3280
The transaction value is 100,000 x 1.3280 USD = 132,800 USD – ie. you sold 100,000 GBP and you bought 132,800 USD.
If your broker requires 1% of $ 132,800 as a margin or 1328.00 USD and GBP / USD falls to 1.3242 / 45, your potential earnings will be:
100,000 x (1.3280 – 1.3245 USD) = $ 350
If GBP / USD starts rising to 1.3300 / 03, your potential loss will be:
100,000 x (1.3280 – 1.3303) USD = 230 USD
How do I manage the risk of margin trading?
The most widely used risk management tools are “limit” and “stop” orders. A limit order can be used to protect your profit if the market starts to move in a favorable direction – the position will be automatically closed at a pre-set price. Stop the order, on the other hand, aims to limit your potential losses if the market is turned against you – the position will be automatically closed at a pre-set price.
Finally, we remind you that margin trading is high risk and the result on the account depends on YOU !

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