How to protect yourself while trading

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How to protect yourself from margin call

Margin is one of the reasons Forex trading has become so common and popular nowadays. It allows traders even with little capital to participate in what would usually be hundred thousand dollar trades at the minimum. However, margin can also turn into a poison pill when you’re on the wrong side of the market. When this happens, your broker will ask you to top up your account balance to keep your account from being wiped out.

The word margin call comes from the call brokers would make in the and 20th century to their clients about their account being almost wiped out. Nowadays, the margin call can be through a voice call, but it is more often by email, although the Forex trading platforms also show a warning if the margin call is reached.

About margin and margin call

There are various terms you will have to understand first before we look at how you can avoid margin calls:

What is margin?

To understand the concept of margin, you can think about it as a mortgage down payment, or a loan. The initial deposit or collateral offered allows you to gain access to a higher valued asset. The same is true for leverage, which acts as the good faith deposit to grant you access to the funds required for the trade.

In Forex, currency pairs are traded in lots, and one standard lot is worth $100,000. For most traders, this amount of money would be hard to raise for just a single trade, but margin can help you. Let’s take the example of a Forex broker who offers leverage at 100:1; to trade one lot, you would only need $1,000 which would turn to a notional value of $100,000 thanks to leverage.

Say, you had $10,000 in your account, $1,000 would be set aside to act as the margin for the trade. In this sense, $1,000 would be deducted from your account and wouldn’t be accessible, but the other $9,000 would still be tradeable. Your 1-lot trade has been traded with a notional value of $100,000 because the broker offered leverage allowing you access to $100,000 with a $1,000 margin, just like taking out a loan or mortgage at a bank.

What is leverage?

Leverage is the ratio of money the broker is willing to put up against your margin. In the above case, margin was 100:1, but some of the best Forex brokers offer up to 1000:1 leverage. With such a leverage, you would only need a margin of $100 to trade one lot worth $100,000. Now you can see why the Forex market is so popular. Traders no longer need thousands of dollars to participate because profits are enormous with minimal capital.

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As you can see, the brokers are usually at a disadvantage when offering high leverage, because they have to put up $99,900 to enable a trader with 1000:1 leverage trade one $100,000 lot. This is why mini and micro lots have been created which require $10,000 and $1,000 respectively to buy one lot.

What is a margin call?

Back to our example, let’s assume the trade went well, and brought back a 1% gain, this would increase the value of the trade to $101,000. For the trader, the entire profit would be theirs, and they would earn $1,000 from the trade, a 100% profit. On the other hand, if the trade went bad, they would also suffer the entire loss. In this case, let’s assume the loss is 1%, which would turn the investment into $99,000, the entire $1,000 loss would be deducted from the $1,000 margin, leaving the trader with nothing.

When choosing a trading strategy, all these factors need to be considered.

To protect their traders, brokers provide margin calls to protect their client’s capital. If the client had more than $1,000 in their account, the losses from the trade would start to be deducted from the remainder of the capital, and the account could be potentially wiped out. Which is why brokers automatically close out trades at a certain percentage.

How to avoid margin calls

What follows after a margin call is usually a stop-out, unless the markets turn in your favour. This is usually one of the worst situation a trader can find themselves in, and you should do your best to avoid being in such a situation. Here are some risk management in Forex tips to keep you away from the dreaded call:

Choose a broker with low margin call level

Being a decentralized market, Forex brokers get to choose their own level for a margin call. These are usually referred to as house requirements among brokers. Every broker will set their margin requirement level depending on various factors including:

  • amount of leverage offered, whereby a higher leverage usually incurs a higher margin requirement level
  • the broker type: ECN, STP or DD (dealing desk). STP Forex brokers tend to have higher margin requirement levels because they stand to lose a lot more compared to ECN Forex brokers to their market makers. (Learn the differences between instant vs. market execution)

The margin level can range anywhere from 100% to 20%, with the stop-out level being slightly lower than that. Various brokers will have varying levels, and you compare Forex brokers and find the one with the least amount of margin requirement level. However, such brokers with very little requirements may also have less favourable trading conditions such as lower leverage, so you should try to find the broker with the right balance for you.

Keep the leverage low

High leverage can be very tempting because it allows you to trade bigger lots and gain larger profits from trades. From the example above, you can see how quickly a $100 trade with a leverage of 1000:1 can be wiped out – even a 0.1% drop would wipe out the margin. With lower margin, a 1% drop would be required to wipe out the margin. By increasing the percentage at which your margin can be wiped out, you reduce chances of margin calls and give yourself a chance for the markets to go your way.

When choosing a Forex broker, take note of the leverages they offer because you may need to adjust your leverage depending on market volatility. When there is little volatility, a higher leverage may be used to magnify the profits from small market movements, while the opposite can be done when volatility is very high.

Have a high capital

Brokers these days have started to include the entire capital in your account into the margin percentage to reduce chances of margin calls. To take advantage of this, ensure you have a reasonable amount of capital in your account. You can now open an account with as little as $50, but this amount makes it easy to lose your entire capital to stop-outs. A larger capital above $1,000 ensures that margin percentage remains high regardless of the losses.

Keep the amount of risk low

This means choosing smaller lot sizes. An entire lot is worth $100,000, but there are mini and micro lots which require less capital and margin. Ensure that the lot sizes you trade are reasonable depending on your trade capital to limit risk. You should also reduce the number of simultaneous trades because numerous trades reduce your margin percentage and put you at risk of a margin call. (Risk-management in Forex)

Always use a stop loss

Finally, the only reason you get a margin call is because you didn’t cut your losses early. Always remember to cut your losses early using a stop loss so that you never get a margin call. The rule is to cut your losses early and let the winning trades run as much as possible.

Most traders, maybe even all traders including myself, have received a margin call during their career. I prefer to look at it as a step of initiation, because it is out of these moments that you learn what not to do and become a better trader. ( The 10 steps of successful traders)

What do you do when you receive a margin call?

Although it is done to request you to deposit more money, you should either allow yourself to be stopped out or close the trades yourself immediately.

When your broker gives you a margin call, it’s because you are losing out on your trades and forgot to cut your losses. This is among the 10 most common mistakes Forex traders make. The Great Bear of Wall Street Jesse Livermore once said that a margin call was an alert that you were on the wrong side of the market.

As we know, the worst thing you can do is hope that the markets will somehow turn around – they don’t. In fact, when an asset is taking a beating in the markets, only a miracle can save it, and we don’t rely on miracles. By funding your account after a margin call, you’re basically hoping that a miracle will happen. As Livermore put it, “Why send good money after bad? Keep the money for another day.” Funding your account once again will, at best, keep you from being stopped out, but chances are high your capital will be severely depleted.

Furthermore, unless you deposit a significant amount of money, those funds may not be enough to keep you from being stopped out. You will already be on the wrong side of the market. Which means that more losses will follow and money for funding your account with the required capital to meet margin requirements will be wiped out and you will receive yet another margin call.

For more on margin calls, here’s a video that illustrates the basics:

Use Stops To Protect Yourself From Market Loss

Many investors and traders do not know how to protect their open positions in stocks, futures, and other securities. Fortunately, some simple strategies manage downside risk in both bull and bear markets. These strategies include buy stops, buy stop-limits, sell stops, and sell stop-limits. Below are some techniques investors can use to place them effectively in any type of market condition.

Types Of Sell Stops

Sell stop and sell stop-limit orders offer two powerful methods to protect long positions. A sell stop order, often referred to as a stop-loss order, sets a command to sell a security if it hits a certain price. When the security reaches the stop price, the order executes, and shares or contracts are sold at the market. The sell stop is always placed below the security’s market price. (To learn more, read The Stop-Loss Order – Make Sure You Use It.)

A sell stop-limit order sets a command to sell a security if a specific price is reached as long as the price does not fall below the limit specified by the investor or trader. When the security reaches the stop price, the order is converted into a limit order, which is executed at the specified limit price or better.

Neither order gets filled if the security does not reach the specified stop price. (To learn more, read Exit Strategies: A Key Look.)

The Short Guide To Insure Stock Market Losses

Putting Sell Stops in Place

The proper use of sell stop and sell stop-limit orders lowers risk and protects your investments, up to a point. These tools keep the decision-making process simple and unemotional, even when the market is in turmoil. They also improve risk management skills by identifying key price zones in advance and increasing the conviction needed to hold firm between those actionable levels.

There are two common methods used to place sell stops, but no magic number or formula will work 100 percent of the time. Also, stops can be raised as the security gains ground.

The first method is to place the stop below the support level. Identify a support level by looking at a chart and finding where it stopped falling during prior downturns. A break below this price often means the security will head even lower before reversing. (To learn more, read Support and Resistance Basics.)

The second method is to place the stop 5 to 15 percent below the purchase price depending on the investor’s comfort level. Theoretically, at least, this lowers the likelihood of a catastrophic loss. In addition, identifying the potential downside in advance allows the investor to prepare for a worst-case scenario.

Sell Orders and Stopping Out

When a security falls into the sell stop price and the order is executed, this is referred to as stopping out. So, while sell stop and sell stop-limit orders keep the investor on the right side of the markets, there will be times when those stops execute just before the security reverses in the intended direction.

How can you avoid this? As a general rule, avoid placing stops at round numbers, such as 10, 40, or 100, because many market participants place stop orders at these levels and invite trouble from opportunistic algorithms and market makers. Instead, the investor can place the order at an odd number or in-between round numbers with enough wiggle room to survive a potential last round of selling pressure.

For example, if many traders place sell stops on XYZ at 35. In this scenario, consider placing the sell stop at 34.75 to provide enough room for a final round of sell orders without incurring an unnecessary loss. While the investor does not know exactly where other traders will place their stops, taking crowd behavior into consideration should decrease the likelihood that an investor will stop out during a temporary downdraft.

Buy Stop and Buy Stop-limit Orders

A buy stop or buy stop-limit order protects upside risk if a short sale position moves against the investor (goes higher in this case). Shorts sell an unowned security by borrowing shares or contracts from the broker with the goal of buying them back at a lower price to make a profit. Conversely, the short seller incurs a loss if the security rises and the short seller is forced to buy it back at a higher price. A buy stop order is used to limit the loss or to protect a profit on a short sale and is entered above the market price. The order is executed at the market if the security reaches this price. (For background reading, see the Short Selling Tutorial.)

A buy stop-limit order covers the short sale when a particular price is reached, at which point the order converts into a limit order. The buy stop-limit order will only be executed at the specified limit price or better, similar to the sell stop-limit order.

Putting Buy Stops in Place

Similar to sell stop and sell stop-limit orders, placing buy stop and buy stop limit orders can be tricky. Fortunately, there are two general rules that offer useful guidance about placement:

  1. The investor should place the stop above the resistance level. This is the price where a security has trouble moving higher. The investor can determine the resistance level by looking at a chart and finding where it stopped rising during prior rallies. A breakout above this price often means the security will head even higher before reversing.
  2. Place the stop 5 to 15 percent above the short sale price depending on the investor’s comfort level. These can also be adjusted upward to protect profits.

Buy Orders and Stopping Out

The same techniques used with sell stop and sell stop-limit orders can be applied to buy stop and buy stop-limit orders. These include avoiding round numbers and placing orders around odd numbers.

For example, if many short sellers place buy stops on XYZ at 35. In this scenario, consider placing the buy stop at 35.25 to provide enough room for a final round of buy orders without triggering the stop and incurring an unnecessary loss. While the investor does not know exactly where other shorts will place their stops, taking crowd behavior into consideration should decrease the likelihood that the investor will stop out during a temporary downdraft.

The Bottom Line

Traders and investors can protect themselves from volatile markets and prevent unnecessary losses by using sell stop, sell stop-limit, buy stop, and buy stop-limit orders. Investors should take the time to adapt these tools to their comfort level and risk tolerance.

How to Protect Yourself From Card Skimming

Learn all about credit card skimming and how to protect yourself from it.

Last updated: 6 March 2020

Credit card skimming is a form of card theft where criminals use a small device (or “skimmer”) to steal your card information from legitimate places of business. These skimming devices can be attached to ATMs or designed to look like a proper card reader.

According to the Australian Payments Clearing Association (APCA) 2020 Fraud Report, domestic counterfeit and skimming fraud cost Australians $6.4 million that year (out of the total $168.8 million Australian-issued card fraud that took place domestically). The same report states that international counterfeit and skimming fraud on Australian-issued cards cost $28.1 million in the same period (out of the $269.1 million Australian-issued card fraud perpetuated worldwide).

While skimming may seem like a small drop in the ocean of other fraudulent card activity (the bulk of which relates to online card theft), it is clearly still a major issue for Australians both domestically and even more so when travelling overseas. Here, we look at the details of this type of fraud and what you can do to protect yourself against it.

How does credit card skimming work?

Credit card skimming devices can be designed to look like hardware on an existing ATM, or like a regular, in-store card reader (e.g. an EFTPOS machine). When a credit card is processed through one of these devices, it can capture the details stored on the card’s magnetic strip.

Skimming thieves will later return to gather all the stolen data of the people who’ve used the tampered ATM or in-store device. With that data, they can create counterfeit clone credit cards or even directly steal money from bank accounts.

It’s worth noting that chip-and-PIN cards are more secure against this type of fraud, as the information stored on the embedded microchip is encrypted. But as these cards also have magnetic strips, there is still some risk of skimming – particularly overseas where chip-and-PIN technology may not be as common.

Common signs of skimming devices

Being aware of what to look out for and paying attention to the key signs of skimming can help in the following situations:

  • In-store. Skimming devices in-store are usually separate to the standard card processing machine. This means that if a skimming device is present, your card would be scanned or tapped on two separate devices. If you notice such suspicious behaviour, it would be wise to report it: both to your card provider and to the local authorities. Remember to keep a copy of your police report because you may need it later.
  • ATMs. It can be harder to detect skimming devices at ATMs because they can be quite skilfully fitted to look like they’re part of the existing machine. You should always look for telltale signs of tampering, including scratches around the card slot, an unfamiliar or odd-looking card slot or any other features that don’t seem right, like if the keypad is overly raised or looks too shiny and new compared to the rest of the machine. Also look out for tiny cameras that could be planted anywhere around the machine (which may be used to capture your PIN as you enter it). If you notice any of these suspicious signs at the ATM, do not use it. Instead report the matter to the ATM owner immediately, as well as the police. If you’ve already used the machine, report it to your card provider as well.

How to protect yourself against skimming

Here are some things you can do to protect yourself from card skimming:

  • Keep your card in sight. If you’re in a store or restaurant, make sure you hold onto your card or keep it within your sights at all times so that you know it is only being used on the one machine.
  • Never share your PIN. Don’t tell anyone your PIN, don’t write it down and definitely do not keep a copy of it in your wallet together with your card.
  • Be discreet with your PIN. As petty as it might sound, covering the keypad as you enter your PIN could help prevent someone stealing from you.
  • Look for signs of tampering. Before you use an ATM, always check for any suspicious features. Also try wiggling parts of the machine, because legitimate ATM machines are solid constructions that don’t usually have loose or moving parts.
  • Avoid outdoor ATMs. While this isn’t always necessarily true, an ATM inside the mall is generally safer than a lone outdoor ATM on the street, based on the logic that the former location makes it harder to tamper with.
  • Check your credit card statement. Checking your credit card statement is a good habit, and it’s now easier to do this regularly thanks to online banking. Doing this is important because you can identify fraudulent transactions as soon as they happen, and your account can be frozen to prevent more theft.
  • Report suspicious activity. Immediately call your bank, the ATM provider (where applicable) as well as the local authorities if you suspect your account has been compromised. You can also report it to Crime Stoppers on 1800 333 000 when in Australia.
  • Notify your bank when you go overseas. Letting your bank know where you are will help them identify legitimate transactions you make when you’re abroad. It can similarly help them detect suspicious activity, and allows them to contact you if they want to verify a transaction. If you’re going away for a long period of time, it’s also wise to inform them that you’re not planning to use the card for a while.

Credit card features that help protect you against skimming

Certain default features already help safeguard your account against fraud:

  • Chip-and-PIN technology. Requiring both a chip and PIN to authorise transactions on your card makes it doubly hard for fraudsters. The embedded microchip holds encrypted details about your card that make it more difficult for criminals with skimmers to obtain your information. The PIN also helps verify in-person transactions so that it’s harder for thieves to use your card for fraudulent purchases. However, you are not always required to enter a PIN, so you should still check your credit card statement as well.
  • Fraud monitoring services. Most credit card providers have established security systems and in-house fraud monitoring teams that can quickly detect unusual card activity. That’s when you may receive a phone call from them asking if a recent transaction was actually yours.
  • Zero liability. Zero liability is a form of consumer protection that all credit card providers are obliged to give you. This means that you will not be held liable for fraudulent activities that appear on your account. However, there are certain conditions and exceptions to this which you should note: you are obliged to report any fraudulent activity as soon as you notice it, and you must also take reasonable care to protect your card from loss or theft. Depending on which card you have, there are some other exclusions which can be found in your card policy.

Finally, although these default credit card features can be a real lifesaver when it comes to card fraud and theft, doing your part and staying vigilant will save you more trouble. Look out for suspicious activity and always report it immediately because it’s definitely better to be safe than sorry.

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