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What is margin, why do we need it?

EFFIZIENTLINK Dec 17 2020

Deliberations of multiple accounts

1) Amount
2) Risk level
3) Investment channels – Commodities, stocks, forex, etc

When applying the strategy, how would you completely UTILIZE your accounts? When you are using margin, it allows a gateway to make your money more powerful than it is but great power comes with greater responsibility. Margin as we know, is a double edged sword which needs to be utilized with great care.


Why do we need MARGIN?
- If you’re a new trader, you might not understand the meaning of margin as yet.

Definition:

- Margin is something which most retail traders need due to insufficient money in our accounts. What is insufficient though? This depends on the trader and their ROI requirement. Some people are happy with $10 a day. Some of us need $100 dollars in a day. Others such as financial institutions might be aiming for thousands in a day to offset their overheads and satisfy their high net worth investors

- Thus margin is something which allows your account to pack a greater punch, especially when dealing with the deep blue sea of the financial markets. Dollar cost averaging, doubling down, diversifying, any other strategies you might have requires margin to work with. 

Case study: If you possess $1,000,000 in your account, and if you’re aiming for a 25% ROI per year, how much margin are you looking at? 25% is a pretty sizable amount per year in the steady winners circle, if you’re looking for more though, simply adjust the numbers below;

25% of 1 million is $250,000 profit in a year (excluding swap charges and any broker commissions).

That makes it about $4800 profit per week on average, and about $960 per day. This would mean you’d need to expose about $19,000 of your funds per DAY to be on the right track to achieve your annual return.

Now you might ask, why did we start with $1,000,000? This is to present the framework of what you’re working with when tackling the ‘deep blue sea’. If you’re working with just $1,000, you’d simply take away the 3 zeroes from $19,000 (equity exposure) which gives you a mere $19. This would mean you are ONLY allowed to risk $19 per day if you’re working with a $1000 account. If you have $10,000 to work with, this makes it only $190 per day.

How much can you actually trade while risking $190 per day? Even a couple of penny stocks and a dollar pair in forex is putting you close. Thus, the need for margin – in order to inflate the buying power of your account. The danger of margin is what brokers dislike talking about, it’s that much easier to LOSE the money you DO NOT HAVE…AKA “blowing up accounts” or even going into the negative where you start OWING money. This happens way more often than people care/want to talk about, mind you.

Thus, this section is just clearing up doubts about what margin is all about and why we need it. How do we manage our margin? How is our strategy keeping us safe? How much margin do we need for our own accounts?

Those questions deserve sections of their own, so stay tuned. 

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