Margin

It is common to trade forex on margin. The margin is the equity you must maintain in your account as collateral to hold a certain position. Trading on margin is a double-edged sword. Being right on a trade greatly enhances your profits, however, operating on margin also amplifies your losses. If the loss reduces your collateral below the minimum level, expect to receive a margin call by the forex broker asking to replenish the funds in the account. If you fail to do so, the broker can liquidate the account.

Currency Pairs

Calculating Profit and Loss

Suppose you believe that the euro is undervalued versus the dollar. Using a quote of EUR/USD 1.4713/19, you pay $147,190 to purchase 100,000 euros. If you have a 2 percent margin account, you will need $2,944 to take the position. If the euro appreciates to 1.4728/1.4735, you realized a profit of $90 (($147,280 — $147,190) x 100,000 euros). That is a difference of 9 PIPs. However, if you were wrong and the euro depreciated to 1.4712/1.4718, then your loss would be $70.

Considerations

References

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