Queries/Observations of a noob.

[maxbale]

Hi All,

So I have started a demo account primarily with FXCM (happy for suggestions on better apps etc). There are a few things i find odd with FX trading etc(previously have done stock trading).

1. Balance/Equity in the app. On a demo account you start with 5k which is simple enough. However, as you can see on them image, I have managed to buy 6k of NZD/USD (at 0.68367 and 0.68508), and 1K of USD/CAD (at 1.35549). All of that adds up to more than £5,000 so I shouldn't of been able to allowed to buy that much surely? As in my head I am doing (5k x 0.68367) + (1k x 0.68508) + (1k x1.35549) which comes to more than 5k. Also as an experiment I just started buying even more at 5k and it didn't stop me once. So I found this very odd? As I expected by 5k balance to reduce by the amount I had bought and then tell me a p/l on that trade etc.

So what I actually assume is, I am not actually buying the 5k lots, I am merely taking the risk as if I was. So instead of risk being 1:1 i am essentially making it 1:5 and each pip movement will be exaggerated by 5. Thus the risk increase and you can either lose your money faster or make more profit.

2. 'Usable Margin'. It says my usable margin is around about 98% however, again based off of my thoughts above this should be something very small if not a negative number. So how should I be thinking of this?

 

[tomorton]

Its down to leverage. FXCM seem to offer up to 200:1 leverage on their mini account (£50-£10k), meaning that for every £1 of real money deposited with them, you could "buy" up to £200's worth of any pair you like. Heavy leverage is one reason why traders are attracted to forex, but its also one of its greatest dangers.

 

[Jason Rogers]

Hi All,

So I have started a demo account primarily with FXCM (happy for suggestions on better apps etc). There are a few things i find odd with FX trading etc(previously have done stock trading).

1. Balance/Equity in the app. On a demo account you start with 5k which is simple enough. However, as you can see on them image, I have managed to buy 6k of NZD/USD (at 0.68367 and 0.68508), and 1K of USD/CAD (at 1.35549). All of that adds up to more than £5,000 so I shouldn't of been able to allowed to buy that much surely? As in my head I am doing (5k x 0.68367) + (1k x 0.68508) + (1k x1.35549) which comes to more than 5k. Also as an experiment I just started buying even more at 5k and it didn't stop me once. So I found this very odd? As I expected by 5k balance to reduce by the amount I had bought and then tell me a p/l on that trade etc.

So what I actually assume is, I am not actually buying the 5k lots, I am merely taking the risk as if I was. So instead of risk being 1:1 i am essentially making it 1:5 and each pip movement will be exaggerated by 5. Thus the risk increase and you can either lose your money faster or make more profit.

2. 'Usable Margin'. It says my usable margin is around about 98% however, again based off of my thoughts above this should be something very small if not a negative number. So how should I be thinking of this?

Hi Maxbale,

You are correct in your assumption. Forex is traded using leverage. Leverage allows you to potentially trade a larger position that what is available in your account balance. I say potentially because you control how much leverage you are effectively using when trading. The currency pairs tend to move a small amount each day and traders use leverage to magnify those amounts. But please note that leverage can act as a double edged sword, magnifying both profits and losses.

For example, when you trade NZD/USD, you are required to set aside £14 as margin for every 1k amount traded. The £14 is the margin requirement to hold the trade open, and you can think of it as a good faith deposit. This amount is listed as Usable Margin in the accounts window. The remainder of your account balance is therefore remaining to either open additional positions or guard against losses on your open positions. This amount is listed in the Usable Margin column of the accounts window.

At FXCM, we recommend using no more than a 10:1 leverage ratio so as not to overleverage your account. If you have an account balance of £5,000, this would mean not trading a position size larger than 50k in your account.

Jason

Risk Disclosure: Remember that forex and CFD trading can result in losses that could exceed your deposited funds and therefore may not be suitable for everyone, so please ensure that you fully understand the risks involved.