How many units can I trade with $5000 in my forex trading account? The topics below are especially important to understand margin trading in order to answer this question.
TOPICS
1. Margin
Margin is the deposited funds held as collateral to cover any potential losses from adverse movements in prices. Margin requirement is set for each account and affects the number of units you can open and sustain.Minimum margin requirement offered by MG Financial is 1%. Under the percentage based margin, the required margin for all accounts is a percentage of the numerical value of the Base Currency or the first currency in the pair. For example, 1% of 1 unit USD/JPY is $1,000 (1% x 100,000USD=1,000USD); 1% of 1 unit EUR/USD is $1,439(1% x 100,000EUR x1.4390 = $1,439).*
For details on margin calculation, please click here.
In theory, with $5000 account equity in your account to trade EUR/USD, you can trade a maximum of 3.4 units ($5000 / $1439 per unit = 3.4 units).*
* Calculated at the market rate of 1.4390 at the time of conversion
In reality, you are not able to trade 3.4 units. There are a few more factors you need to consider...
2. Spread
The spread of any currency pair is the difference between the Bid and Ask rate of the two currencies in the pair. For example, spread for EUR/USD with current Bid rate of 1.4387 and Ask rate of 1.4390 is 3. When a position enters the market, your position immediately reflects the revaluation of market value. Under flat market conditions, when entering the market your position may see a negative P/L equivalent to the spread of the currency pair you are trading.3. Pip Value
The pip value of 1 standard unit (100,000) for either of the currency pairs of EUR/USD, GBP/USD, and AUD/USD is $10.Calculation of Pip value of pairs with USD based currency or Crosses, such as USD/JPY, USD/CAD, or GBP/JPY is a bit more complicated. The Profit Loss Calculator is a useful tool to calculate profit or loss of a potential trade.
Pip value can be used to calculate how many pips of movement your usable margin can sustain. For example, if your usable margin is $200 and you have 1 unit EUR/USD, the account can sustain 20 pips of market movement against you.
4. Usable Margin
The usable margin is the amount remaining to place additional trades or amount to sustain market movement against your position. This value is calculated by taking your Account Equity less the Used Margin. Usable margin in simpler terms is the balance of your account less used margin and +/- Profit/Loss. Please remember that because Usable Margin takes into consideration Profit/Loss, this amount changes with market movement.5. Possible Scenarios
Now let's try to answer the question...Beginning Account Equity of $5000 and 1% Margin requirement**
** Calculated at the market rate of 1.4390 at the time of conversion
Scenario 1- Trade 1 unit EUR/USD
Usable Margin= $5000 (Beginning Account Equity) - $30 (3 pip spread x $10 per pip) - $1439 (Required margin for 1 unit) = $3531
$3531 (Usable Margin) / $10 (pip value for 1 unit EURUSD) = 353 pips
Your account can therefore sustain 353 pips of movement against you for 1 unit position.
Scenario 2- Trade 1.5 units EUR/USD
Usable Margin= $5000 (Beginning Account Equity) - $45 (3 pip spread x $10 per pip x 1.5 units) - $2158.5 ($1439 margin per unit x 1.5 units) = $2796.5
$2796.5 (Usable Margin) / $15 ($10 per pip x 1.5 units) = 186 pips movement
Your account can therefore sustain 186 pips of movement against you for a 1.5 unit position.
Scenario 3- Trade 0.1 unit EUR/USD
Usable Margin= $5000 (Beginning Account Equity) - $3 (3 pip spread x $10 per pip x 0.1 unit) - $143.9 ($1439 margin per unit x 0.1 units)= $4853.1
$4853.1 (Usable Margin) / $1 ($10 per pip x 0.1 unit) = $4853 pips
Your account can therefore sustain 4853 pips of movement against you for a 0.1 unit position.
Scenario 4- Trade 3 units EUR/USD
Usable Margin= $5000 (Beginning Account Equity) - $90 (3 pip spread x $10 per pip x 3 units) - $4317 ($1439 margin per unit x 3 units)= $593
$593 (Usable Margin) / $30 ($10 per pip x 3 units) = 19 pips
Your account can therefore sustain 19 pips of movement against you for a 3 unit position.
Scenario 5- Trade 0.5 units EUR/USD
Usable Margin= $5000 (Beginning Account Equity) - $15 (3 pip spread x $10 per pip x 0.5 units) - $719.5 ($1439 margin per unit x 0.5 units)= $4265.5
$4265.5 (Usable Margin) / $5 ($10 per pip x 0.5 units) = 853 pips
Your account can therefore sustain 853 pips of movement against you for a 0.5 unit position.
Client can also require margin greater than 1%, e.g. 2% or 3 %, and here is an example of trading 1 unit of EUR/USD at the market rate of 1.4390, with 2% margin requirement.
Scenario 6- Trade 1 unit EUR/USD with 2% margin requirement
Usable Margin= $5000 (Beginning Account Equity) - $30 (3 pip spread x $10 per pip) - $2878(2% x 100,000EUR x1.4390) = $2092
$2092 (Usable Margin) / $10 (pip value for 1 unit EURUSD) = 209 pips
Your account can therefore sustain 209 pips of movement against you for 1 unit position with 2% margin requirement.
From the various scenarios depicted above, you can see there is no definite answer to this question. This is highly dependent on the investor's appetite for risk. The investor must also take into consideration all relevant factors and make sure to keep enough usable margin in his/her account to sustain market movement.
No comments:
Post a Comment