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Understanding OANDA's FXTrade Margin Rules

The OANDA FXTrade Platform allows currency trading on a margin basis. There is an upside and a downside to margin-based trading. The upside is that the trader can strongly leverage the funds in the account and generate a large profit relative to the amount invested. The downside is that the losses can be just as great, and the trader can easily risk all of the funds in the account. Hence it is important that traders fully understand OANDA's margin rules as described below before they start trading.

What is margin trading

When a trader buys (goes long) or sells (goes short) a currency pair, then the value of the currency pair, as an instrument, is initially close to zero. This is because (in the case of a buy) the quote currency is sold to buy an equivalent amount of the base currency. As the market rates fluctuate, however, the value of the currency pair position held will also fluctuate. Thus, if the rate for the currency pair goes down, the trader's long position will lose value and become negative. To ensure that the trader can carry the risk in the case a position results in a loss, banks typically require sufficient collateral to cover those losses. This collateral is typically referred to as margin.

Margin-based trading refers to trading in transaction sizes larger than the funds in the account. By leveraging the funds in the account, traders can take better advantage of small movements in the market to build up profits quickly. Conversely, leveraging one's account to trade in larger transaction sizes can just as easily work against a trader and magnify losses, essentially putting most of the funds in the account at risk.

OANDA's margin rules

There is no minimum margin deposit required to open a trading account with OANDA. However, OANDA's FXTrade Platform enforces two rules or requirements:
5% margin requirement for new trades

The OANDA FXTrade Platform requires that trading customers have at least 5% collateral on all positions when a new trade is made. Thus, in order to buy or sell 1,000,000 EUR/USD, a trader must have the equivalent of 50,000 Euros in value in his/her account. The margin can be comprised of cash holdings in the trader's home currency, or of unrealized profit in the open positions he/she might have.

Fully understanding this in detail, unfortunately, involves some math. Consider the following definitions:

• Account balance: the amount of funds currently in your account. The account balance is equal to all of the funds ever deposited into your account, minus all of the funds ever withdrawn from you account, adjusted for any profits or losses that have been realized through trading. The account balance is displayed in the "Account Summary" section of the user interface.
• Unrealized P/L: the amount of profit or loss that is held in current open positions. This is equal to the profit or loss that would be realized if all open positions were to be closed immediately. For example, if a trader is currently long 10,000 units EUR/USD, which was bought at 0.9136, and the current exchange rate for EUR/USD is 0.9125/27, then that position represents 10,000 * (0.9125 - 0.9136) = 10,000 * (- 0.0011) = - 11, or an unrealized loss of $11.
  The unrealized P/L continuously fluctuates with the current exchange rates and is displayed in the "Account Summary" section of the user interface.
• Account Equity: the sum of the account balance and the unrealized P/L.
• Total Position Amount: the sum of the base units of all open positions converted to USD using the bid rate. For example, if a trader has two open positions consisting of
  • long 10,000 units USD/CHF and
  • short 20,000 units EUR/JPY,
    and the current EUR/USD rate is 0.9134/06, then the Total Position Amount is equal to 10,000 + (20,000 * 0.9134) = 10,000 + 18,268 = 28,268.
• Margin Available: the difference between Account Equity and 5% of Total Position Amount if the difference is non-negative and 0 otherwise. For example, if account equity is equal to $12,000 and total position amount is $100,000, then the Margin Available is equal to 12,000 - (0.05 * 100,000) = 12,000 - 5,000 = $7,000. On the other hand, if account equity is equal to $4,990 and and total position amount i.e. $100,000, then the Margin Available is equal to 0, because 4,990 - (0.05 * 100,000) = 4,990 - 5,000 = - 10. The margin available changes with every trade and also continuously fluctuates with the exchange rates; it is displayed in the "Account Summary" section of the user interface.

With these definitions, then the 5% margin requirement for new trades states that if a new trade were to be executed then 5% of the Total Position Amount must be less than the Account Equity immediately after execution of the trade should the trade go through. For example, if a trader has Account Equity of $2,000, two open positions consisting of
- long 10,000 units USD/CHF and
- short 20,000 units EUR/JPY,
the current EUR/USD exchange rate is 0.9134/06, and the trader would like to buy an additional 5,000 units of USD/CHF, then the Total Position Amount should the trade be executed would be:
10,000 + (20,000 * 0.9134) + 5,000 = 10,000 + 18,268 + 5000
or $33,268. The 5% margin requirement for new trades states that 5% of $33,268 (which is equal to $1,663.4) must be less than the Account Equity. In this example, Account Equity is $2,000, $1,663.4 is less than $2,000, so the new trade will be executed successfully.

Another way to look at it is if the new trade does not offset an existing open position, then the Margin Available must be greater than 5% of the number of units to be traded when converted to USD using the ask rate. Hence, if the Margin Available is $6,000, the current EUR/USD rate is 0.9134/36, the trader has no open EUR/USD position at the time, and the trader submits a sell trade for 100,000 EUR/JPY, then the margin requirement is met and the trade can be executed, because $6,000 is greater than 0.05 * (100,000 * 0.9136) = 0.05 * 91,360 = $4,568. On the other hand, if the Margin Available is $4,500 and the trader submits a sell trade for 100,000 EUR/JPY, then the trade will be rejected by the system "due to insufficient funds", because $4,500 is less than the $4,568 margin requirement.

The buy/sell window of the user interface displays the maximum trade size for the trade being considered, given the margin available for the trader.
2.5% margin requirement for open positions

The margin requirement for open positions states that the Account Equity must, at all times, be larger than 2.5% of the Total Position Amount. If this requirement is not met, then the OANDA FXTrade Servers will automatically liquidate all open positions in the account using the prevalent market exchange rates at the time of liquidation. The OANDA FXTrade Servers continuously monitor the value of all positions in all accounts to determine whether the 2.5% margin requirement is met and when open positions need to be liquidated. The trader must assume that such a liquidation will happen without warning, and it is the responsibility of the trader to monitor his or her account to see if this might happen. We strongly recommend that traders make use of Stop/Loss limits to limit their risks. There are two ways a trader can prevent total liquidation of his or her open positions: (i) close a portion of the existing open trades so as to increase the available margin, or (ii) transfer additional funds into the account so as to increase the Account Balance.

If a trader is logged in, then the system will make an attempt at warning the trader when the Account Equity drops below 4% of the Total Position Amount, and again when the Account Equity drops below 3% of the Total Position Amount. The warning takes place through a window that pops up automatically.

Limiting risks

Trading on a margin basis means that any market movement will have a proportionate effect on a trader's Account Equity. This can work for a trader as well as against a trader. The possibility exists that a trader could sustain a total loss of funds. We strongly encourage traders to continuously monitor that status of their account and to specify a stop-loss order for each open trade in order to limit downside risk. A stop-loss order specifies that a trade should be closed automatically when the exchange rate for the currency pair in question reaches the specified threshold. For long positions, the stop-loss rate is always lower than the current exchange rate; for short positions, it is always higher. The stop-loss rate can be specified at the time the trade is issued, or a stop-loss order can be added at any time for any open trade. Moreover, the OANDA FXTrade Platform allows traders to change their stop-loss orders at any time to take current market prices into account. This can be achieved by clicking on an open trade in the "Open Trades" table and then suitably "modifying" the trade in the resulting pop-up window.