Trading with margin basis describes one case, trading with an item, its price is more than your capital with a lot of doubles.
Some brokers provide trading with margin Basis.
They allow you to trade with an item its price is more than your capital, but the company deposits a percentage from your capital as a commission for trading.
This percentage returns to you after the deal completed, whether you are a winner or a loser.
Trading with Margin in Forex
Those brokers don’t share profits or loss with you, and don’t ask you to pay the value of the item after its selling.
The company task is to implement orders of purchase and selling which you determine and with the price you choose.
You should have an account in the company which you are dealing with, and put an amount which is not increase or decrease until the company decides to buy an item for trading.
Your account will be divided into two parts:
Used margin that is calculated through number of contracts × size of contract / percentage of doubling.
Usable margin that is calculated through your account – used margin.
Used margin is the maximum amount that you can lose in the deal.
An example: if you make a deposit 300$ in a company which is specialized in sunglasses, you bought a precious Ray.Ban sunglasses from this company with 1000$.
It is fantastic, but its price is more than your amount 3 doubles.
If you want to trade, go to the market for selling sunglasses,
which is like any other market and subjected to the law of supply and demand,
the more are the sellers the fewer are the buyers, so the price is declined.
The fewer are the sellers, the more are the buyers, the price is raised.
You went to the market and found that demand on sunglasses is huge.
You found that there is a buyer who want to buy it with 1100$, but you said ” I will wait for a while”
So the price has raised to 1200$, its actual price was 1000$, so you will win 200$,
because you will pay 1000$ for the sunglasses company, hence it will ask you to sell your sunglasses.
The company will implement the order and sell it with 1200$, put 200$ in your account,
which is considered your profit from the deal in addition to 100$ which the company has discount as a commission for the sunglasses, so your account will be 500$.
You can withdraw all the amount or a part of it,
you can also make another deal because you are a winner. Winning is a fantastic thing.
But, if you went to the market and found that buyers are more than sellers,
and there aren’t a lot of buyers who want to buy your item, what will you do?
The sunglasses price will fall from 1000$ to 950$.
You will lose 50%. So, you will wait as you hope that the demand would increase on your sunglasses and the price returns to rise.
But, what will happen if the demand isn’t increase, and supply increased? Sunglasses price will declined more and more from 950$ to 900$.
If you ask the company to sell, you will lose 100$.
If you say “I will wait”, but the price continues its decline till it reaches 800$,
the company watches sunglasses price in the market as you do,
and it interferes because the a mount that you have as a usable margin = 200$ and it is the maximum amount that you can lose in this deal.
If you decide to sell with 800$, there is no problem and it is over. But if you wait, the company will send you a call margin.
Call margin is a warning which the company asks you to sell the sunglasses or to add more amounts to usable margin.
What is this means ?
Sunglasses company watches price all the time, if there is any change in sunglasses price,
it supposes that you will ask it for selling, as it isn’t sharing profits with you, it isn’t afford any loss.
So, you have two choices, whether you ask the company to sell the sunglasses or add additional amounts to your account.
If you don’t, the company will sell sunglasses without your order, fearing the price would down more and more.
The moment which the company decide to sell sunglasses fearing from your loss is called Auto Close.
If you understand the previous example,
you understand principle of Trading with Margin in forex.
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