The Forex market is exciting and accessible to small retail traders because of the industry's high leverage options. Leverage gives a trader the ability to increase the potential return on an investment. Leverage works both ways however; and it also increases potential risk. Therefore leveraging magnifies both gains and losses.
Leveraging a position involves putting down collateral, known as margin, to take on a position that is larger in value. CMS Forex offers a maximum leverage option of 50 to 1 on all major pairs and 20 to 1 on all minor pairs. This means to take on a standard $100,000 lot or contract for a major pair, a minimum margin of $2,000 is required; For a minor pair, a minimum margin of $5,000 is required.
How is this possible? In the Forex market, when trading the established currencies that CMS Forex offers, the amount that a currency changes in any given day is quite small. A one cent (or approximately 100 pip) change in the value of a currency is considered a large move. Therefore we can afford to hold a fairly small amount of collateral for any given position.
For example let's take a trader with $3,000 in his account. Our trader buys 1 lot of USD/JPY at a price of 97.25 with the 50:1 maximum leverage. His utilized margin is $2000. If the position makes money, the gains are added to the equity in the traders account. Likewise if the position goes against the trader the losses are subtracted from the account's total equity. If the price moves 100 pips in the trader's favor (the exchange rate moves upwards one yen to 98.25), then the trader would make a $1,000 profit (at almost $10 per pip × 100 pips). The trader has effectively made a 50% return on his $2,000 account or a 50% gain on his $2000 margin. Conversely if the position had gone at least 100 pips against the trader, his position would have been closed due to a margin call when his account equity dropped below his $2000 margin requirement. The trader would have a loss of approximately $1000, or 33% of his initial account, and about $2000 remaining in his account.
To minimize our clients' overall risk exposure the above requirements are calculated on a per-account rather than per-position basis. For example, if you buy 4 lots of USD/JPY and sell 2 lots of USD/CAD, the margin requirement for your account will be $12,000.
CMS Forex requires 2% margin on the notional value of clients positions on the major pairs* and 5% margin on the notional value on minor currency pairs†. That translates to a leverage of 50:1 or 20:1. If you choose to have a larger margin requirement in order to make you leverage smaller than 50:1, please email Customer Service with your name, account number and the margin requirement option you wish applied to your account.The full list of currency pairs and their maximum leverage is as follows:
In the forex market all contract sizes are not created equal. The standard size of a position is called a Lot. The size of 1 Lot is 100,000 units of the top currency (or the base currency) in a currency pair. For instance, 1 Lot of USD/JPY is equal to 100,000 USD, while 1 Lot of EUR/USD is equal to 100,000 EUR. Therefore, even though both contracts are 1 Standard Lot, they have different notional values. When opening a position the different notional values will affect how much margin is required to take out that position.Example #1 1 Lot of USD/JPY = 100,000 USD;
Clients with accounts denominated in a base currency other than US Dollars should convert the above amounts into their base currency to calculate their margin requirements. For example a Japanese Yen based account with an open 1 lot position would have a margin requirement of ¥195,000 Japanese Yen if the current USD/JPY rate is 97.50 [$2000 USD × 97.50 = ¥195,000 JPY].In the case of a British Pound based account, an open 3 lot position would have a margin requirement of £6,000 British Pounds if the current GBP/USD rate is 1.5100.