Retail forex contributes roughly around $313 billion in daily transactions or approximately about 8% of the total daily turnover of the whole foreign currency market. With the high leverage and margin gained by retail forex traders from the trading system used by all retail forex brokers, market observers and critics are often amazed how the forex market is able to maintain its efficiency and ensure all trading obligations are met – meaning losses are paid and profits are cashed.
Retail forex brokers are able to ensure trading obligations are always met through two simple trading rules they impose. The first rule is to make sure that every trade made is required to be covered by sufficient margin deposit which must be at least equivalent to the required margin deposit per tranche (or lot) traded. For regular tranches with minimum lot sizes of $100,000 this would mean a minimum margin deposit of $2,000 per tranche. This translates to a 50:1 leverage in compliance with U.S. regulatory requirements. Micro and mini accounts having smaller lot sizes have smaller minimum margin deposit requirements but such should not have leverages that exceed the leverage cap of 50:1.
Foreign based brokers who are not covered by U.S. regulations are able to offer higher leverage which ranges from a low of 100:1 to as high as 400:1 leverage and margin deposit requirements of $1,000 and $250.
By making sure every trading account has sufficient margin deposits as required before they are allowed to trade guarantees that any obligations incurred in the form of trading losses resulting from adverse price movements will be, and can be paid.
The other rule brokers impose limits the maximum losses that an account can incur for every open position. The maximum point they will allow accounts to accumulate losses is only up to the price level where the unimpaired balance of the margin deposit (or that part of his deposit not tied to losses) is equivalent to no less than 25% of the required minimum margin deposit per lot. They call this as the margin call point and represent the price level where any outstanding position or open trades will be automatically closed or liquidated because at this point the unimpaired portion of their capital (or margin deposit) is merely 25% of the required margin.
These two rules on leverage and margin requirements are incorporated in all the trading platforms that every online retail forex broker provides their clients for use in their trading activities. This means they will be automatically executed. A trade cannot be executed using these platforms if there is no sufficient deposit in the account according to the required margin deposits. It also means all open positions will be automatically cut at a loss once the margin call point is reached.
In theory, leverage is gained by the use of borrowed capital and it is largely believed that retail forex brokers lend capital to their clients to be able to volume trade the currencies. The truth is the borrowed capital or the lending is only for the books. The reality is that the actual trading, as can be gleaned from the above explanations, revolves around and involves the margin deposit put up by a trader in his trading account. And, the smaller the deposit is, the closer the margin call point will be. The closer the margin call point is, the nearer he will be to being cut off from the market. Also, the higher the leverage is, the smaller the required margin deposit will be and the closer to the cutoff point he becomes.
These are the realities and the truth about leverage and margin in retail forex trading which every trader must accept. The earlier the trader realizes these implications to his bottom line, the better it will be for him.