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FXCM to Introduce Margin Changes to Hedged Positions

Hedging – opening a long and short position for the same instrument at the same time – is a trading strategy forbidden in the U.S. However, many brokers from the remaining part of the world allow it and traders can take advantage of it. 

 
Here I would like to mention a curious phenomenon. Imagine the following situation: you have an account with $1,000 and open a one-lot long position on EUR/USD. After that you hedge your position by selling one lot EUR/USD. If the broker doesn’t have a hedge margin requirement, you can keep doing that forever. 
 
This way traders can keep huge opposite positions, which hold no risk at a first glance. However, as soon as the trader closes the hedging positions, they find themselves with a disproportionately big exposure, and even the slightest market movement can cause a margin call. 
 
With most brokers, the margin on hedged position is neutralized – e.g. there was no margin requirement. This happens because when the price moves, you are down on one of the positions but up on the opposing one for the same amount, so your profit equals your loss until you close one of the positions. 
 
Furthermore, the result of the hedged positions seems fixed, however it varies together with the spread – so a sudden spread widening (let’s say during news release) can also lead to a margin call. 
 
Just look at the example below: 
 
We used a demo Forex.com account to make these trades and at a leverage of 1:200 it only took us a margin of $640 to place orders for these 10 lots.   
 
FXCM, one of the largest forex brokers globally, has found a way to prevent that. The broker will have a new rule for the margin requirement on hedged positions: the margin requirement will be divided amongst the two positions. In other words, margin will be acquired for one of the sides of the hedged orders (50% of the overall position). This new rule is supposed to be activated on December 2, 2012, however it is already live on FXCM’s demo accounts. 
 
“Under the current system where no margin is required, some traders have inadvertently opened positions that were disproportionately large compared to the size of their account. In some cases clients have received margin calls when closing one side of the position (which would then trigger an added margin requirement for the remaining un-hedged side,” said Jaclyn Klein, VP Corporate Communications at FXCM for ForexMagnates.com. 
 
As it seems, too many customers were getting their accounts liquidated after hedging their losers, losing money on other positions, and then closing the profitable side of the hedged position. This drove FXCM to think out of the box and suggest a solution that would encourage traders to practice sensible risk management. 
 
The new hedge margin rule will be implemented across all the FXCM’s subsidiaries except for Forex Captial Markets LLC FX in the USA, where hedging is prohibited by NFA’s Compliance Rule 2-43. 
 
 

About FXCM Inc.

 
FXCM Inc. (NYSE: FXCM) is a global online provider of foreign exchange (forex) trading and related services to retail and institutional customers world-wide.
 
At the heart of FXCM's client offering is No Dealing Desk forex trading. Clients benefit from FXCM's large network of forex liquidity providers enabling FXCM to offer competitive spreads on major currency pairs. Clients have the advantage of mobile trading, one-click order execution and trading from real-time charts. FXCM's U.K. subsidiary, Forex Capital Markets Limited, also offers CFD products with no re-quote trading and allows clients to trade oil, gold, silver and stock indices along with forex on one platform. In addition, FXCM offers educational courses on forex trading and provides free news and market research through DailyFX.com.
TAGS: forex trading  forex hedging  FXCM  Forex.com  forex margin  forex leverage  forex position 

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