Return on Collateral/Security Deposit/Margin
Leverage allows the trader to increase the possible ROI on an investment. The amount of the ROI is expressed as a percentage of the margin amount. For instance, if you gain $200 on a trade which was initiated with $1,000 on margin, your return on margin is 20%.
Example:
The Trader buys 100,000 GBP at 1.9505 USD (using US$1000 as the margin amount).
- The Trader calculates a potential profit and places a limit order of 1.9620 (Potential profit of US$1,115.00)
- The Trader calculates a potential loss and places a stop at 1.9475 (Potential loss of US$300)
- Within the next hour the GBP rallies to 1.9592, stalls and begins to reverse.
- The Trader decides the limit will not be reached, so he closes his position by selling the GBP at 1.9558 and locks in a profit of US$530.00
- The Trader made a profit of US$530 on a margin amount of $1000 = 53% return on margin in an hour.
Source:
http://209.85.173.132/search?q=cache:F1AKfPCKJVEJ:www.silversandcapital.com/investinginforex.aspx+forex+return+on+margin&cd=7&hl=en&ct=clnk&gl=us&client=firefox-a
Study Guide >> Forex Trading Calculations >> Return on Collateral
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