Explain forex leverage, margin calls, and long term positions to me?

luce.rocks

luce.rocks

Hi folks,

I'm trying to get my head around fx. I'm tentatively thinking it might be a good idea to buy USD/AUD early next year, hold it for a year, then see where things are at the end of the year.

From my initial googling, it seems most fx is highly leveraged. How does this work if you want to hold a long-term position? How do you avoid margin calls or having your position closed out automatically on a bad day?

Imagine I want to use $5000 AUD leveraged at 1:100 to buy $500,000 AUD worth of USD and I want to hold it for a year or so. How would this work, practically? Would I need to put $50k, $100k, etc into an offset account somewhere as a guarantee that the broker wouldn't close out my position?

Sorry if I haven't used the right terminology and my question doesn't make sense - this is all super new to me.

Cheers,

Luce
 
First up I'm no expert.

Buying 500k will use all your funds at 1:100 leverage, some companies offer higher leverage on major currency pairs (like usd/aud). Higher leverage will leave additional funds to maintain your margin account without investing more capital and stop your position been closed if it swings against you, however this could increase your losses if you don't have a stop loss in place.

Another thing to consider is interest. I believe it works by calculating the difference in the pairs respective interest rates. So if the USD is paying more than the aud you should be paid interest, if not you will have to pay the difference.

I've only messed around with practice accounts. Too much like gambling without in depth knowledge IMO.

Good luck!
 
I will tread carefully guys :)

There just seems to be so much talk of a looming recession in Oz that I thought it was worth investigating. Just looking at headlines and articles from the last few months, it seems the consensus is that the AUD might rally for a month or two but then weaken throughout 2015?

At any rate, I've started a practice account with Oanda, so I can see how it all works. And I'll keep googling and researching.

Feel free to suggest any blogs, sites, resources, etc. for me to check out. For the moment (which has only been the last 48 hours!) I'm just reading the business/economy sections of the normal newspapers, economist, etc..
 
Keep in mind that shorting AUDUSD 500K will cost you $32 a day, or $11700 per year in negative carry interest.

At 100:1 leverage fully utilised your account would not last longer than a few days. Even with 50K margin it would be wiped out by a return to 0.90, unless you had stops before that and locked in your losses.

Always expect the unexpected, be able to handle AUDUSD returning to parity or have an exit strategy in place. I had one oanda subaccount wiped out in 2008 when unprecedented events occurred in the FX markets and have been very cautious since.

Beware of your FX wins, they will create over confidence, carelessness, and set you up for destruction.
 
High levels of leverage are a way for a company to make profits out of clueless punters.

Let's say you took out a $50,000 short position at 100:1 leverage, and the AUD spiked from $0.81 to $0.82 against the dollar, which happened a day or two ago. The FX company would then make a margin call against you, as your losses exceed your stake, and take your cash.

The net result is that most people who do FX trading will lose money because they run leverage at too high a level.

I'd do a Google on the subject, but this article is a good place to start:

http://www.bloomberg.com/news/2014-...-lures-otc-forex-traders-who-mostly-lose.html
 
So it's best to go with lower leverage, plenty of money left in your margin and set a step loss? Makes sense :)

I've opened a practice account with Oanda. So far I'm having fun just working out what everything does. It's scarily addictive! My initial thought was just to buy and hold some USD during 2015 and ride out any short term ups and downs. But in trying to figure out how the platform works, I've had to place some pretend trades. I've been following the pips for hours. It's dangerous! Lol.

I'm using these figures:

-100k balance
-buying and selling blocks of 500k
-using 25k leveraged at 1:20

I'll practice trading for a few months and see how I feel. Then maybe instead of just buy and hold, I might give trading a burl!
 
Right now this forum has 3774 traders online, it is the biggest FX forum by far

http://www.forexfactory.com/

On here you will find just about anything you want to know/ask about trading Forex. The biggest risk on FX is the news spikes, NFP announcements, first Friday of the month, causes every currency to spike up to a cent (100) pips in the blink of an eye. Stop losses are gapped and closed at the worse price possible,leverage is not your friend.

One thing to be aware of is that even if you only use 50 to one leverage you can still lose a lot of money with relatively small movements, such as the past month in the AUD.

If you think SS takes lot of reading to keep up wait till you try FF :eek:
 
luce.rocks said:
So it's best to go with lower leverage, plenty of money left in your margin and set a step loss? Makes sense :)

I've opened a practice account with Oanda. So far I'm having fun just working out what everything does. It's scarily addictive! !
Click to expand...


Bloody hell Luce, never took you for a crazy gambling type. :)


See ya's.
 
Macca said:
Right now this forum has 3774 traders online, it is the biggest FX forum by far

http://www.forexfactory.com/

On here you will find just about anything you want to know/ask about trading Forex ... If you think SS takes lot of reading to keep up wait till you try FF :eek:
Click to expand...


Thanks Macca. I'll have a look. Though, to be honest, I tend to think people on SS are saner than people on other investing forums. :)
 
Thanks for all the helpful information so far, it's much appreciated :)

OK, another forex question. I'm trying to put together a trading strategy to practice during my demo period.

Among other things, I'm going to have daily, weekly and monthly goals. My daily goal will be to make $200. Most sites I've looked at recommend making only 1-5 trades per day to minimise risk. In terms of risk minimisation, I find myself stuck on the following:

If I make $200 on my first trade of the day should I:
a) walk away for the day, having reached my goal or
b) take a break, have lunch, whatever, then come back, look at the chart and try again

Likewise, if I lose $200 on my first trade, should I:
a) walk away for the day, start fresh tomorrow or
b) take a break, have lunch, whatever, then come back, look at the chart and try again

They say you shouldn't try to win back your losses, but does that mean that the opposite is true? That you should risk your profit for the day by trying for a win?
 
Luce, I want to offer a non-leveraged approach to profiting from foreign currency movements. I recommend the HSBC multi-currency accounts. This is like a regular savings account wherein I store cash savings. This account allows you to store your savings in most major currencies you want. No leverage, no borrowings.

Lets say you have 1m USD in this account. When you see a significant currency movement, like 1 AUD is now worth 70cents USD, then I will opt to switch my USD into AUD. The exchange rate is very competitive and it works instantaneously. This account is great for long term holds without worrying about margin calls, complex terminology or close watching of market. In fact, with some currency holdings, they will pay you interest on your savings. Obviously, not something for constant, rapid gains but something to help you profit from long term currency trends.
 
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