Because a trader can open an account from $1 to $1,000,000 and trade any size lot, margins and leverage are something of a misnomer in FOREX.
Broker-dealers allow you to set your own fixed maximum leverage— typically from 10:1 to 100:1. Dealers are mostly concerned that you do not hold open positions in excess of your account balance. If you do—or even come close—you will get a margin call, and you will be expected to meet it immediately. A broker may even liquidate part or all of your position(s) without informing you.
The lower the margin requirement, the higher the leverage factor. Profits and losses are magnified as the leverage is increased.
In reality today margin calls in FOREX are rare. Brokers are able to electronically monitor all parameters based on your account size, trading activity, and experience. If you attempt to enter an order outside of those parameters it will not execute. Big Broker is watching you!
Simple money-management rules—that you implement—are the key to avoiding margin calls and overtrading. In Chapter 16, “Money Management Simplified,” I offer the Campaign Trade Method for novices.
I recommend these basic four ideas to new traders: (1) never commit more than one-half of your account balance to open positions, (2) never trade more than two market pairs concurrently, (3) never commit more than 25 percent of your capital to a single position, and (4) never trade over 50:1 leverage. Begin your trading career at 20:1 and work up in increments of 10:1 as you are successful, and start with a demo account, move to a micro-account then to a miniaccount before committing your full grubstake. Experienced traders often modulate these parameters according to how confident they are of a trade. But that requires experience to make it an effective tool. New traders should keep the number of money-management parameters simple and to a bare minimum.
Broker-dealers allow you to set your own fixed maximum leverage— typically from 10:1 to 100:1. Dealers are mostly concerned that you do not hold open positions in excess of your account balance. If you do—or even come close—you will get a margin call, and you will be expected to meet it immediately. A broker may even liquidate part or all of your position(s) without informing you.
The lower the margin requirement, the higher the leverage factor. Profits and losses are magnified as the leverage is increased.
In reality today margin calls in FOREX are rare. Brokers are able to electronically monitor all parameters based on your account size, trading activity, and experience. If you attempt to enter an order outside of those parameters it will not execute. Big Broker is watching you!
Simple money-management rules—that you implement—are the key to avoiding margin calls and overtrading. In Chapter 16, “Money Management Simplified,” I offer the Campaign Trade Method for novices.
I recommend these basic four ideas to new traders: (1) never commit more than one-half of your account balance to open positions, (2) never trade more than two market pairs concurrently, (3) never commit more than 25 percent of your capital to a single position, and (4) never trade over 50:1 leverage. Begin your trading career at 20:1 and work up in increments of 10:1 as you are successful, and start with a demo account, move to a micro-account then to a miniaccount before committing your full grubstake. Experienced traders often modulate these parameters according to how confident they are of a trade. But that requires experience to make it an effective tool. New traders should keep the number of money-management parameters simple and to a bare minimum.
