All foreign exchange contracts are traded on margin. This means that traders only have to deposit a small percentage of the value of the contact traded. The result of this is incredible leverage; providing traders the means to magnify potential trading profits much more than had they been required to invest the total face value of the contract traded.
The margin must be provided before any trade is executed. It is also prudent to deposit additional funds to cover any margin requirements should the trade not perform as expected.
If markets move against the trade, the margin covers the loss until that loss is actually realised. If markets move in favor of the trade, the margin remains in the account. If markets move against the trade and then return to profitability, the margin is returned.
Margin minimises risk for both the trader and the broker, as it limits the broker’s exposure as well as the amount the trader can lose in any given trade. It is a security buffer to ensure all market participants can honor their trading obligations.
NSFX Minimum Margin Requirements
Traders must maintain Minimum Margin Requirements at all times.
NSFX offers leverage up to 1:30. This translates to margin requirements of up to 3.33%.
Margin Calls – Marking to Market
All Forex trades are “marked to market.” This means that the position is monitored in real-time to ensure that losses are covered by margin and that profit positions are also easily ascertained.
Should, at any time, a Trader’s Equity equal or fall below 50% of the Used Margin for a Trader’s Account in total, NSFX will liquidate any part of or all Open Positions in a Customer’s Account. That is why it’s important to always maintain adequate margin cover and avoid receiving margin calls.
Closure of positions is performed on a best endeavors basis, with best execution always a priority. Similarly, NSFX will attempt on a best endeavors basis to contact the trader with an Equity Notification if their equity, at any time, equals or falls below 100% of the Used Margin.
There will be certain occasions when the Bid-Ask spread widens beyond the average market spread. This is usually a result of market illiquidity such as at market open, or during rollover at 10:00 PM GMT for example, the spreads may widen in response to uncertainty regards market direction or to increased market volatility.
Trade rollover is typically a very quiet period in the market, since the business day in New York has recently closed and there are still a few hours before the day begins in Tokyo. Please be aware of these patterns and take them into consideration, particularly regarding your margin and stop out levels when trading with open orders or placing new trades.
This may also occur during news events and spreads may widen substantially in order to compensate for the tremendous amount of volatility in the market. The widened spreads may only last a few seconds or as long as a few minutes. NSFX highly recommends traders use extra caution when trading around news events and always be aware of their account equity, usable margin and market exposure as widened spreads can adversely affect all positions in an account including hedged positions.
Margin Requirement – Example
Following is an example of a real life forex margin and margin call.
Margin requirement depends on the leverage of the instrument – 1:20 or 1:30; and the USD value of the position.
For example, the USD value of a 10,000 EUR/USD (“Mini-Lot” or 0.1 Lots) position bought at price of 1.1000 will be:
- 10,000 X 1.1000= USD11,000. With a margin requirement of 3.33% (1:30 leverage), it will cost USD366 to open the position.
- If the EUR strengthens from 1.10 to 1.11 against the USD, the notional profit will be:
10,000 X 1.1100=USD11,100 less USD 10,000 X 1.1000=USD11,000 or USD100.
- If the EUR weakens from 1.10 to 1.09 against the USD, the notional loss will be:
10,000 X 1.1000=USD11,000 less USD 10,000 X 1.0900=USD10,900 USD or USD100.
To keep a losing position open, traders must have sufficient funds in their account to cover the marked to market loss.
Using the above example with a margin requirement of 5.0% (1:20 leverage), results in a cost of USD550 to open the position (10,000 X 1.1000= USD11,000 X 5% = USD550).
(units 100,000) 1.0 Lot
(units 10,000) 0.1 Lots
(units 1,000) 0.01 Lots
* The above illustrations are mere fictitious examples and are not to be construed in any way to constitute investment advice.
Margin – Disclaimer
Margin requirements may change from time to time. In order to prevent any confusion, NSFX Ltd., will always, on a best endeavors basis, make its best attempt to inform traders about any projected Margin Requirements Changes via email or phone.
“Calculate hedged margin using larger leg” enables the mode of calculation of margin using the larger position. For example, if there are two hedging positions of one symbol, but with different volumes – sell 1 Standard Lot EURUSD at 1.1268 and buy 2 Standard Lots EURUSD at 1.1260, then the total margin will be equal to the margin of the larger position (2 Standard Lots EURUSD at 1.1260).
An example using 1:30 leverage.
2 Standard Lots x 1.1260 / 30 = €7,506.7
Should your account be denominated in USD or GBP, the Base Currency Margin, in this case €7,506.7, requires a currency conversion from € to GBP or USD.