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Profit and loss

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Understanding how profit and loss works is critical to online margin trading, as the P&L directly affects the amount of margin you have to work with.

Margins:
Changes in margin will determine how much you can trade, and for how long if prices move against you.

Brokers require a margin. Thus, when you open a currency trading account, you will need to have some cash to cover the collateral to support the margin requirements.This deposit is referred to as your opening margin balance. All subsequent trades will be collateralized from your margin balance.

Online forex brokerages do not issue margin calls, which are a request for more collateral to support an open position. Rather, they establish ratios of margin balances to open positions that must be maintained at all times. This may be confusing but it is very important for currency trading that you understand this.

Required margins work like so: If you have an account with a leverage ratio of 100:1, this means that for $1 of margin in your account can control $100 position size. However, let's say your broker requires 100% margin ration, meaning you need to maintain 100% of the margin at all times. What this means is if you have a position size of $10,000 your need $100 in your account. If your accounts margin balance falls below this ratio, the broker can liquidate your position, locking in your losses. How your currencies are doing will determine your margin balance. Be sure you understand your broker's requirements and liquidation policies, and for the account sizes, as you would not want to have an account liquidated because it fell below margin, and you did not realize it.

Most online brokers will provide you with real time mark-to-market calculations showing your margin balance. What is mark-to-market? It is a calculation that shows your unrealized P&L based on where you could close your open position at that moment in time. In other words, if you closed your position, squared up, went flat, what your P&L would be.Thus if you are long, it is where you could sell, and if you are short, it is where you can buy.

Realized P&L is what you get when you close out a trade position or a portion of a trade position. Thus when you go flat, whatever you have made or lost will go into your margin balance.

Thus your margin balance is a sum of your initial balance, the unrealized P&L and your realized P&L.

If you are in a winning position your unrealized P&L is positive, and your margin balance increases as a result. If the market moves against you, the unrealized P&L is negative, and thus the margin balance is reduced. This is why you need to pay attention to your margin balance as it is constantly changing based on the unrealized P&L.


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