Understanding the Concept of ‘Margins’

Because of the large amounts of money that changes ownership at every trade, most of the players in any Forex trading market will include larger organizations and corporates and even governments. Individual investors can find it almost impossible to find that kind of money to go up against such powerful adversaries. In order to give them a toehold into the Forex trading market, many brokers allow their clients to invest in the Forex market on something called a ‘margin’.

This means that the broker will give the client a short term loan of up to 99% of the required total amount if the investor can come up with just 1% of the total. If this may sound too good to be true; it is. If all goes well, the investor as well as the broker come out of the deal smiling.

Understanding the Concept of Margin Calls

However, these deals can also go sour and result in what is called ‘margin calls’- not a very nice scenario for the investor. If you, as the investor wish to invest in euros in anticipation that it would rise against the dollar, you would need to pay the broker 1 % of the total cost you wish to invest; the broker puts in the balance 99%. If the euro gets devalued against the dollar in the ensuing days the broker may debate the wisdom of letting the investment ride. At some point if the broker decides that the money he has loaned you is at a high degree of risk, he can decide to make a margin call. This means that your investment will be sold off at lower than the buying price and you are obligated to make up to the broker for the loss he has suffered.

Tips & Strategies for Avoiding Margin Calls

Only deal with brokers you know and trust – While you do not have to be back-slapping buddies or intimate friends with your broker, it is important that you know enough about him to be able to trust him. Don’t make the mistake of trading in a good, trustworthy broker for a flashier one who promises you the moon; you could very well find yourself hearing far too many margin calls for comfort.

Maintain a healthy credit – Be realistic about your financial status and avoid jumping into the deep end of Forex trading using all your savings. Forex trading is too volatile for small players. If you absolutely must; make sure you only limit yourself to trading with money that you can afford to lose.

Keep an eye on the market – In fact keep both eyes on the market. Currency prices are extremely sensitive and will fluctuate quicker than you can imagine and with the huge sums involved, even a marginal fluctuation can result in an overwhelming loss.

If you intend trying your hand at Forex trading, the best advice you can get is to stay ever sharp and diligent in order to avoid getting crushed by margin calls.

Explaining Stop-Loss, Limit-Order & One Cancels The Other (OCO) Orders

Take for example the USD/CHF currency pair that is being traded at 1.4625, which means the dollar can be sold for 1.4625 Swiss Francs. One of the distinctive traits of Forex trading is that exchange rates change rapidly and that too, by large amounts. If the dollar happened to be on the downslide and fell to about 1.4600 within a specific time- it could be one hour or one day- the investor may want to consider issuing a stop loss order at 1.4575. This stop loss order converts into market orders, which are then subject to realization when it has reached the stop price.

Trying to determine your stop price can be tricky. While you may hesitate to pull out in the event of a 5% price drop in the hope that it would recover, you may very well wish you had gotten out at a 10% if the price goes down to another 20%.

On the flip side, you’d be over the moon if your luck turned and the price went up to 1.4900. It’s all in the timing and therein lies the catch; it is almost impossible to predict which way the market is headed.

You may wish you could put in an order for selling when the market price reached its peak but it’s difficult to determine where the peak is. There’s no way of knowing whether a drop back in the market is just a momentary downward fluctuation or the onset of a precipitous drop. To be on the safe side you can request a limit order and lock in at least some of the profit.

One Cancels the Other (OCO) Orders offer the investor a middle path wherein he can request the broker to make a decision based not only on one condition but on a pair of possible conditions. If, for example, the investor had simultaneously placed a limit order at 1.4725 and a stop order at 1.4575, upon the realization of any one of the conditions, the second part of the order automatically stood canceled.

Practical Implementation of One Cancels The Other (OCO) Orders

One Cancels the Other (OCO) Orders can be placed by investors to purchase Swiss Francs at 1.4700 or euros at 1.1905. The different ‘mix and match’ combinations that are available will invariably differ from one broker to the next as well as the kind of account you hold and the relationship you have with your broker.

While it is always advisable to have a diverse spectrum of investing strategies, implementing One Cancels the Other (OCO) Orders is by far one of the simpler and more effective of all Forex trading techniques.