A high percentage of the deposit is involved, or when is a margin call coming? Part 1
Beginner traders often make the common mistake of using too high a percentage of their deposit to make a deal. The free part of it is so small that just a few tenths of points of market movement in the opposite direction from the forecast results in such an unfortunate phenomenon, as a margin call (margin-call), and then a stop-out - forced closure of a position by a broker due to lack of funds to cover the loan. The meaning of the illusion, which is misleading, lies in the nature of margin trading and the erroneous expectation of an exclusively positive result.
The meaning of margin trading is that a trader, when applying for the services of a dealing centre, has the right to use the credit provided by it for currency trading.
Depending on the trading conditions stated by the broker, the amount of this credit can be 20, 50, 100 or even 200 times higher than the deposit. This value is called a leverage, and is specified in the trading regulations as 1:20, 1:50, 1:100, etc.
Thus, placing a deposit of $1,000, you can actually have a sum, for example, 100 times larger, i.e. $100,000. Doesn't it tickle the nerves? And you begin to involuntarily suffocate from the unfolding prospects.
It is the leverage that allows you, with relatively modest means, to earn very immodest profits. That is exactly what makes a beginner's head spin, making him forget about the danger of bankruptcy.
The trap is set by the dealing centre. Most of the time luring the Forex beginners to the currency market and vividly describing all the advantages of Forex trading, brokerage companies mostly emphasize that you will definitely and without fail make profit in three or four digit amounts of banknotes with the American presidents. It is to earn, not to lose. The catch is that you can't do without losses. Especially at the beginning of a trader's career, when experience and discipline are scarce, or rather both are practically non-existent. And absolutely any trading strategy contains both deals that were closed with profit and deals that were closed with a loss. Of course, one would like to immediately find and adopt profitable trading strategies for beginners, where the sum of profits at the end of the period exceeds the sum of losses. But it is out of the realm of fantasy. No one trades only in the plus all the time, and even Soros had bad years.
As a rule, to lure a trader to the currency market, the dealing centres have a team of sophisticated market makers who create a lot of advertising material. The flashing banners that grab your attention focus solely on the round sums of your potential earnings. And it also paints a carefree future of you relaxing on the beach with your laptop, sipping a martini and watching the sunset.
The articles contain beautiful pictures with the price charts, which show the date of entering and exiting the market, and it is presented in the form that some girl, who was lying on a sofa, trading with a standard lot of 100 000 units, has earned $ 2400 on EUR/USD for two days. And all this with only $1500 on deposit! A person, who is actively searching for ways of earning, sees such a picture, thinks: "And why do I go to my hateful job when I can get 10 times more in just two days, spitting at the ceiling?"
If you compare several versions of the text of such agitations, you will notice that only positive trading results are discussed. These articles don't describe the risk Masha took buying a standard 100 000 units of currency pair EUR/USD with a deposit of 1500 dollars. There's also silence about the minimum amount of security (collateral). At best, there is a warning in small print with an asterisk, saying that trading on the currency market is a risky activity, and that the client, i.e. the trader, is fully responsible for the consequences of decisions made on transactions.
To better understand what we are talking about, we need to calculate the percentage of the deposit made by Masha, whose quick and easy earnings we all quietly envy, and what it was threatening her with.
So, there is such a notion as minimum deposit size determined by trading conditions regulated by a dealing centre. It is, for example, 25% of the current amount of funds on deposit. This means that if the current loss amount will occupy the remaining 75% of the deposit, the broker will carry out a forced closing of the position (StopOut operation), and only 1500*0,25=357 dollars will remain on the deposit. Frustrating, isn't it?