Margin-Based Trading

When a trader buys (goes long) or sells (goes short) a currency pair, the value of the currency pair, as an instrument, initially is close to zero. This is because (in the case of a buy) the quote currency is sold to buy an equivalent amount of the base currency. As the market rates fluctuate, however, the value of the currency pair position held will also fluctuate. Thus, if the rate for the currency pair goes down, the trader's long position will lose value and become negative. To ensure that the trader can carry the risk in the case a position results in a loss, banks typically require sufficient collateral to cover those losses. This collateral is typically referred to as margin.

By leveraging one's account to trade in larger transaction sizes, traders can better take advantage of small movements in the market to build up profits quickly. Conversely, leveraging one's account to trade in larger transaction sizes can just as easily work against a trader and magnify losses.

To limit downside risk, traders often specify a stop-loss rate for each open trade. The stop-loss specifies that the trade should be closed automatically when the exchange rate for the currency pair in question reaches a certain threshold. The trader may change his/her stop-loss order at any time to take current market prices into account. For long positions, the stop-loss rate is always lower than the current exchange rate; for short positions, it is always higher. Traders, at times, also specify a take-profit rate for their trades in order to lock in a profit when the exchange rate reaches a certain threshold. For long positions, the take-profit rate must be above the current rate, while for short positions, it must be below the current rate.

To review BizFOREX's margin policy, refer to the Margin Explanation document.