Home FXTrade Margin Rules (Post November 30, 2003)

Understanding OANDA's FXTrade Margin Rules

(Updated November 30, 2003)

NOTE: The following document describes OANDA FXTrade Margin rules as they apply for trades executed on or after November 30, 2003. For trades opened prior to that date, OANDA’s old FXTrade margin rules will continue to apply.

SUMMARY

• OANDA FXTrade requires a minimum margin of 2% on positions in the major currency pairs and 4% on positions in all other currency pairs. This corresponds to a leverage of 50:1 and 25:1, respectively.
• Major currency pairs are those currency pairs where both currencies are one of:

• Clients can set the maximum leverage on their FXTrade account to any one of the values listed in the following table, where lower leverage leads in higher margin requirements:
   
  

  Max. Leverage	10:1	20:1	30:1	40:1	50:1
  Margin Requirement:	10%	5%	3.3333%	2.5%	2%
  Margin for non-major currency pairs	10%	5%	4%	4%	4%

  
   
  
• An FXTrade account will receive a margin call, when the margin required becomes twice the Net Asset Value of the account (or, in other words, if the margin required divided by two becomes larger than the net asset value of the account). A margin call results in an automatic closing of all open positions, and is necessary to ensure that clients do not lose more than the account balance.

Introduction: What is Margin Trading

The OANDA FXTrade platform supports margin trading, which means you can enter into positions larger than your actual Account Balance. However, OANDA requires sufficient collateral to ensure that you can cover any losses you might incur on your positions. This collateral is typically referred to as margin. Although there is no minimum margin deposit required to open an FXTrade account with OANDA, the margin available in your account will limit the size of the positions you can open and will affect when you receive a margin call. (A margin call is a situation in which the FXTrade Platform automatically closes all of your open positions and may be necessary to ensure that you cannot lose more than the amount of collateral in your Account.) This document describes what the margin requirements are specifically and when a margin call can occur.

One advantage of margin-based trading is that you can strongly leverage the funds in your account and potentially generate large profits relative to the amount invested. The downside is that you can also potentially incur significant losses in your margin capital very quickly. The term “leverage” is often used to describe the margin requirements. A leverage of 50:1 corresponds to a margin requirement of 2% --- 1 divided by 50 is 0.02 or 2% --- which means then when you wish to open a new position, then you must have 2% of the size of that position available as margin. Another way of saying the same thing:, for each dollar margin available you can make a 50 dollar trade.

A 50:1 leverage is the maximum offered by OANDA. Other companies may offer 100:1, or even 200:1, leverage, but OANDA believes this is far too risky and can cause you to lose your funds very quickly. You only very rarely find serious professionals trading at that level of leverage. Besides having a leverage of 50:1, OANDA clients can also cap their leverage to 40:1, 30:1, 20:1, or 10:1. We recommend 20:1 or lower. In any case, NFA requirements require that regardless of the set account leverage, OANDA cap the leverage on non-major currency pairs to 25:1, corresponding to a margin requirement of 4%. Tables in the Summary above list the major currencies and list the margin requirements for different levels of leverage.

As a trader, you are often faced with the following questions:

• Given my account status, how much margin do I have available?
• Given available margin, how large a trade can I make?
• Given a potential trade size, how much available margin must I have?
• How far away am I from a margin call?

Answers to these questions are provided to you automatically by the FXTrade Platform and by the OANDA Margin Calculator. For example,

• the Margin Available field in the Account Summary Table of the FXTrade user interface tells you how much margin you have available;
• the Buy/Sell window will always tell you the maximum number of units you can trade, given your available margin. (also refer to the Units Available Calculator)
• the Margin Calculator tells you how much margin you need for a particular trade; and
• the Account Summary of the User Interface indicates how far away from a margin call you are with the “Margin Call” field.
  

Calculating the Net Asset Value

The term Net Asset Value represents the current value of your account. It includes your account balance as well as all unrealized profit and losses associated with your open positions. If you were to liquidate your account by closing all positions and withdrawing all your funds, then the Net Asset Value indicates what that would be.

If you have no open positions, then the Net Asset Value is simply equal to your Account Balance. (The Account Balance is equal to all of the funds ever deposited into your Account, minus all of the funds ever withdrawn from your Account, adjusted for interest and any profits or losses that have been realized through trading). The Account Balance is displayed in the “Account Summary” section of the FXTrade User Interface.

If you have open positions then it gets just a bit more involved. The Net Asset Value is equal to your account balance plus/minus any unrealized P/L incurred so far.

Unrealized P/L refers to the profit or loss held in your current open positions. This is equal to the profit or loss that would be realized if all your open positions were to be closed immediately.

Example:
If your account is in USD and you are 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 x (0.9125 - 0.9136) = 10,000 x (- 0.0011) = - 11, or an unrealized loss of $11 USD.

Your Unrealized P/L continuously fluctuates with the current exchange rates if you have open positions and is displayed in the "Account Summary" section of the FXTrade user interface.

Net Asset Value is the sum of your Account Balance and your Account’s Unrealized P/L. It represents the current value of your Account. The Net Asset Value of your Account continuously fluctuates with the current exchange rates if you have open positions and is displayed in the "Account Summary" section of the FXTrade user interface.

Calculating Margin Used

Margin Used is equal to Position Value multiplied by Required Margin, summed up over all open positions. Position Value is the size of the position (in units) converted from the Base currency of the currency pair in question to your Account currency using the bid-rate.

Example:
You have a USD account and a short open position of 10,000 units EUR/USD.
If the current EUR/USD rate is 0.9134/36, then the EUR/USD Position Amount is equal to (10,000 x 0.9136) = 9,136 USD.

Required Margin depends on the currency pair and the maximum leverage set for your account:

Example:
You have the following open positions: 10,000 long EUR/USD and 20,000 short EUR/CZK.

You have set your maximum leverage to 50:1. Your Account is in USD and the current EUR/USD rate is 0.9134/36
The Position Value of 10,000 EUR/USD long is 10,000 EUR converted to USD, which is equal to 10,000 x 0.9136, or $9,136. The margin requirement forEUR/USD is 2% (when the account maximum leverage is set to 50:1). As a result, the margin required on this EUR/USD position is equal to
$9,136 x 0.02, or $182.72.

The Position Value of 20,000 EUR/CZK short is 20,000 EUR converted to USD, which is equal to 20,000 x 0.9136, or $18,268. The margin requirement for EUR/CZK is 4% (when the account maximum leverage is set to 50:1). As a result, the margin required on this EUR/CZK position is equal to $18,268 x 0.04, or $730.72.

The Position Value of your account is $9,136+$18,268 = 27,404. The Margin Used on your open positions is equal to $913.44.

Example:
Same example as above but with maximum leverage set to 20:1.
The Position Values remain the same, but the margin required is equal to 5% of the Position Value, which is ($9,136 x 0.05) + ($18,268 x 0.05) = $456.80 + $913.40. Hence, the Margin Used on open positions is equal to $1,370.20.

Account Leverage	50:1	40:1	30:1	20:1	10:1
Margin for EUR/USD	2%	2.5%	3.3333%	5%	10%
Margin Used by 10,000 EUR/USD	9,136 x 0.02 = $182.72	9,136 x 0.025 = $228.40	9,136 x 0.0333 = $304.53	9,136 x 0.05 = $456.80	9,136 x 0.1 =$913.60
Margin for EUR/CZK	4%	4%	4%	5%	10%
Margin Used by 20,000 EUR/CZK	18,268 x 0.04 = $730.72	18,268 x 0.04 = $730.72	18,268 x 0.04 = $730.72	18,268 x 0.05 = $913.40	18,268 x 0.1 = $1,826.80
Total Margin Used	$913.44	$959.12	$1,035.25	$1,370.20	$2,740.40

Calculating Margin Available

We are finally at the point we can calculate the margin a trader still has available to initiate new trades.
Margin Available is equal to the greater of $0 or “Net Asset Value” minus the “Margin Used”. Note that this value continuously fluctuates if you have open positions: the Net Asset Value changes with the value of your open positions, and Margin Used changes over time as the exchange rates change. If Margin Available is $0, then you cannot open new positions or increase existing positions.

Example:
If your Net Asset Value is equal to $12,000 USD, your maximum leverage is set to 50:1, and:
(a) the Total Position Value is $100,000 USD for a position which is comprised of a Major Currency Pair, then the Margin Available is equal to 12,000 - (0.02 x 100,000) = 12,000 - 2,000 = $10,000 USD. On the other hand, if Net Asset Value is equal to $1,990 USD, then the Margin Available is equal to $0, because 1,990 - 2,000 = - 10, which is less than $0.

(b) the Total Position Value is $50,000 USD for a position which is comprised of an Non-Major Currency Pair, then the Margin Available is equal to 12,000 - (0.04 x 50,000) = 12,000 - 2,000 = $10,000 USD. On the other hand, if Net Asset Value is equal to $1,990 USD then the Margin Available is equal to $0, because 1,990 - 2,000 = - 10.

(c) the Total Position Value is $150,000 USD, made up of $100,000 USD for a position which is comprised of a Major Currency Pair and $50,000 USD for a position which is comprised of an Non-Major Currency Pair, then the Margin Available is equal to 12,000 – [(0.02 x 100,000) + (0.04 x 50,000)] = 12,000 - 4,000 = $8,000 USD. On the other hand, if account equity is equal to $1,990, then the Margin Available is equal to $0, because 1,990 - 4,000 = - 2,110.

Margin available is also displayed in the Account Summary section of the User Interface.

Calculating Margin Required for Opening New Trades

Calculating the Margin Required to open a new trade is relatively straight forward in most cases. If you are creating a new position or are increasing an existing position, then you can calculate the Margin Required for the new trade as described above. If the Margin Required is less than or equal to the Margin Available, then you are allowed to make the trade. If the Margin Required is greater than the Margin Available, then your order will be rejected, should you submit it. You are always able to execute a trade if it reduces a position of your account. If your trade reverses a position (i.e., goes from long to short, or from short to long), then it is easiest to consider the margin requirements of your positions immediately after executing your order under the assumption your order is successfully executed. If the margin requirements are less than the Net Asset Value under that assumption, then you have sufficient margin to make the trade.

Margin Calls

OANDA FXTrade requires that you always have sufficient margin to cover any losses you might incur. As soon as that is no longer the case, then FXTrade will automatically close all your open positions using the prevalent market rates at the time of closing so as to prevent further losses from occurring.

Specifically, the Margin Used (i.e. the margin requirement of your open positions) divided by two must always be less than the Net Asset Value of your account. If this requirement is not met, then a margin call will occur without warning, and with that margin call, all your open positions will be closed. You are responsible for monitoring your account to see if a margin call may happen. For your convenience, the “Margin Call” field in the Account Summary of the User Interface is always set to the Margin Used divided by two. The closer this value is to the Net Asset Value, also shown in the same table, the closer you are to a margin call.

If you are logged in to FXTrade, then the system will make an attempt at warning you when the Net Asset Value comes to within 5% of a margin call, and again when the Net Asset Value comes to within 2.5% of a margin call. The warning takes place through a window that pops up automatically on your screen. Please note that in a quickly moving market there may be little time between warnings, or there may not be sufficient time to warn you at all.

Example:
The FXTrade Platform has determined, as described above, that for your open positions, you have a margin requirement of $10,000 USD. You currently have $10,000 USD in your Account and Unrealized P/L of $1,000 USD for a Net Asset Value of $11,000 USD.
The exchange rate moves unfavorably against your open position. When your Unrealized P/L approaches -4,750 USD, your Net Asset Value has now declined to $5,250 USD. Since this is within 5% of half the margin requirement, FXTrade will issue a first warning. I.e.
($10,000 / 2 ) x 1.05 = $5,250

The exchange rate continues to move unfavorably against your position. When your Unrealized P/L approaches -4,875 USD, your Net Asset Value has now declined to $5,125 USD. Since this is within 2.5% of the margin requirement divided by two, FXTrade will issue a second warning. I.e.,
($10,000 / 2 ) x 1.025 = $5,125
The exchange rate continues to move unfavorably against your position. When your Unrealized P/L exceeds -5,000 USD, your Net Asset Value has now declined to below $5,000 USD. Since the Margin Requirement for your open positions (=$10,000) divided by half (=$5000) is now higher than your Net Asset Value, and FXTrade will automatically close all your open positions.

It is not a good idea to get a margin call. We suggest that you take proactive measures to prevent getting a margin call on your account. Overall, we recommend that you use a lower level of leverage. This makes a margin call less likely. We strongly encourage you to continuously monitor that status of your Account and to specify a stop-loss order for each open trade in order to limit downside risk. . The stop-loss rate can be specified at the time the trade is issued. A stop-loss order can be added at any time for any open trade. Moreover, the OANDA FXTrade Platform allows you to change your 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.

But if you happen to get under pressure by being close to a margin call, the unique features of the FXTrade platform allow a simple strategy to prevent margin calls. Because FXTrade allows you to trade in arbitrary units (as opposed to fixed lots), you can incrementally reduce the size of your positions as you get close to a margin call. For example, every time you get your first Warning, you can reduce the size of all your open positions by 10%. This effectively lowers the amount of margin required, giving you more breathing room. Alternatively, you can close individual positions, also to reduce the amount of margin required. Finally, it is possible to transfer additional funds into your account, although you should be aware that delays in fund transfers could cause the funds to arrive too late.

(Some erroneously believe that OANDA might benefit from a client getting a margin call. The truth is that OANDA does not benefit at all. To the contrary. Firstly, OANDA hedges its exposure for trades made by its clients by making corresponding trades with its third party banks. As a result, if you lose money on your trade through OANDA, OANDA loses a corresponding amount to its third party bank. Secondly, traders who lose money have less money to trade with and often stop trading. As a company, OANDA benefits when its customers trade. The bottom line is that each margin call harms a client and it harms OANDA.)