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
One Comment
You may want to change this as NFA has changed its rules regarding Margin Requirements as of 10-18-2010;
The NFA Required Margin/Security Deposit on Majors is 2% of the notionally traded amount.
A Major currency pair as described by the NFA must be comprised of 2 currencies both of which must be from the following list: AUD, CAD, CHF, DKK, EUR, GBP, JPY, NOK, NZD, SEK, and USD.
Examples: USD/NOK, EUR/SEK.
All other currency pairs have a required margin of 5% of the notionally traded amount.
Examples: USD/MXN, EUR/HUF
Notional Amount needs to be in USD terms.
If USD is base currency
Notional Amount = amount traded
If USD is Quote Cuurency
Notional Amount = Amount Traded x Rate
Updated example:
The Trader buys 100,000 GBP/USD at 1.9505 (using 2% as the Required Margin).
(Traded Amount X Rate) = Notional Amount, Notional Amount X Margin Percent = Margin Used, or
(100,000 X 1.9505) = 195,050 X 2% = $3,901.00
The Trader calculates a potential profit and places a limit order of 1.9620 (Potential profit of US$1,150.00)
The Trader calculates a potential loss and places a stop at 1.9475 (Potential loss of US$300)
Within the next hour the GBP/USD 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/USD at 1.9558 and locks in a profit of US$530.00
(Notional Amount X Margin %) = Margin Used, (Profit / Margin Used) = Return on Collateral.
$530 / $3,901.00 = 13.59%
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