Posted by forex at 5:34 AM
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1. Determine the leverage provided by the Forex broker. This usually requires a simple email or phone call to the broker. As of April 2010, U.S. law provides Forex brokers with up to 100X leverage for their clients. This means that a $100 trade would only require $1 in actual cash in the account. The leverage is even greater in other countries, such as the United Kingdom which provides 200X.
2. Determine the minimum margin balance required by the broker for the currency valuation you wish to trade. This usually requires a simple email or phone call to the broker. For example, if you wish to speculate on the value of the euro against the dollar, this conversion rate may currently be 1.33. The broker usually rounds up to 1.5 to provide slack for changes in these rates. These numbers are frequently adjusted by brokers as currency values fluctuate. If the leverage is 100X, then the minimum margin balance for a single unit of trade in the euro/dollar transaction is $150, or 1.5 x 100.
3. Divide your current cash holdings in the brokerage account by the minimum margin balance requirement for the currency you wish to trade. This number is the maximum number of Forex contracts you can purchase using the broker's margin rates. If you have a $3,000 account and wish to trade euro/dollar at $150 minimum margin per contract, then you can transact up to 20 contracts with your current account size. Without margin, this same transaction of 20 contracts would require $300,000 in cash.