How to Minimize Losses in the Forex Market

What are margin requirements? A margin is a small deposit, which allows you to leverage a large contract (unit or lot) size and all this will depend on the clearinghouse. In the forex market, each clearinghouse has one or multiple margin requirements. For example, 1% (100:1 ratio) or 2% (100:1 ratio) margin based on a $100,000 balance would either be $1,000 margin or $2,000 margin. This means 1 unit is $1,000 margin or 5 units is $5,000 margin etc.

What is the difference between balance and equity? Balance is the amount that is fixed until any open positions or units are closed. The balance would then either increase or decrease. Equity is the amount floating that either increases (positive) or decreases (negative) during any open position. In essence, equity is the balance minus the margin and floating loss or profit. Some would say this is the true balance and is the most important figure to be watched while trading.

Below is a risk/reward ratio comparison between 2 traders:

Trader 1 has a $100,000 balance and has 7 units (1% margin) opened. His balance will be fixed but the equity balance will be $93,000 with 7% risk exposure.

Trader 1 has a minimum 93% in floating equity. This would be considered a conservative trading strategy.

Trader 2 has a $10,000 balance and has 7 units (1% margin) opened. His balance will be fixed but the equity balance will be $3,000 with 70% risk exposure.

Trader 2 has a minimum 30% in floating equity and this would be consider a high risk trading strategy since he has exposed more than half of his equity in the market.

Once a novice trader (80% of day traders) realizes his or her over exposure, it is usually too late and is a hard lesson learned. For prevention and awareness, a complete understanding of margin requirements is required. Distinguishing equity versus the balance will help minimize losses in the forex market.