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Why Usable Margin Matters

Sean Hyman (June 1, 2009)

Monday, June 1, 2009

By Sean Hyman Some Forex traders think all you have to do is “call the right direction” on any given Forex trade and you’ll always have success in your trading. However, it’s a bit more complicated than that.

In Forex trading, not only do you have to pick winning currency pairs, but you also have to have “enough room” left in a currency pair to let those pairs turn in your favor.

That “extra room” is called your “usable margin.” So let’s talk about what usable margin is and why it matters for a moment.

When you buy or sell a currency pair, you are putting down a “good faith deposit” on that trade. That good faith deposit is money that your FX dealer automatically sets aside in your account so you can control a certain position. You also have to pay the spread, as your FX dealer’s fee for executing the trade for you.

The remaining funds in your account are your usable margin. This is the amount of your account that is left over after the cost of your deposit and spread (or how much you have to invest with).

This is important to know because if you’re not paying attention, you could drain your trading account. That means you’ll get a margin call. A margin call happens when your FX dealer contacts you to either say you’ve been knocked out of a trade for lack of funds, or worse: You owe additional funds.

On your trading station, it will look something like the visual below. In this case, the Usbl Mr column is the usable margin.

Usable Margin is How Much “Room” You Have Left Before a Margin Call!

So why is this important? For starters, you need a margin for error. Even the professional Forex traders know they often won’t call an exact top or bottom in a trade even doing their best analysis.

So pros understand they need to have plenty of slack leftover in their account so they can stay in positions longer. They want to give a certain currency pair enough time to move in the right direction. And most pros are willing to take a smaller hit in the short-term, if they’re expecting a profit in the longer run (whether it’s hours later or days or weeks later).

The novice, on the other hand, rarely leaves themselves any “wiggle room” in this regard. That’s a huge difference between the pro and the novice.

Therefore, the pro is still in a trade as the pair turns like they thought it would…while the novice received a margin call long before that, only to finally see the pair turn in the direction that would have reaped them profits.

I’m sure you can relate to this. I bet most people have been there at one point or another. If so, don’t beat yourself up. Just think like the pros.

Pros Leave More Slack Than You Think

Pros risk usually 1-5% of their account and have a stop in place at that point. That way they are ALWAYS far from a margin call (far from using up their entire usable margin).

Many trading novices let greed rule their account. They bet 20% or 30% (or more of their accounts) on single trades so they can make 100% or more on one trade.

So if you use stops correctly and watch your usable margin, then you should have plenty of slack left in your account to make consistent profits (provided you choose the correct currency pairs of course). This way if you’re stopped out a time or two on the trade, you still have plenty of margin left to get back in before the pair finally heads in your direction.

Bottom line: Greedy traders often get margin calls, while savvy traders watch their usable margin, place stop-losses, and take enough time to actually earn WINNING TRADES.

Take it from me: There will always be suckers out there who bet too much…but it doesn’t have to be you.

Related Articles:

A Beginner’s Guide to the Forex Market

The Trader’s Edge: What Separates Pros from Average Joes in Forex

How and When Should You Use a Trailing Stop?

Sean Hyman, “Professor FX” and Long-Time Currency Analyst Explaining How You Can Succeed in the Currency Markets.
Sean Hyman spends his days teaching his fellow professionals in the industry how to trade the $4 TRILLION currency market. Now he brings his 15 years of financial experience to you. From long-term currency strategies, to quick FX-trading moves usually reserved for the professionals, Sean will tell you everything you need to know to succeed in the currency markets.

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