Forex Margin Trading

Margin trading Forex is a good way of leveraging your money, it allows you to increase your purchasing power. Leverage simply means that you can use a small amount of money to control a much larger amount of money.

 This is possible to do, because it is unlikely that the currency value will change by more than a small percent over a short period of time. So if you can place several hundred dollars in your Forex account to use for margin trading your broker will in effect lend you the balance.

Margin trading is well known in futures and stock trading, because of the nature of currencies, you can obtain a lot more leverage in the Forex market. a lot of it will depend on what your broker’s terms are, it is possible to control anywhere from 50, up to as much as even 200 times your Forex balance. This can create very large profits if you are good, but the flip side is, large losses if you’re not good.

 In general, the more you use margins and the higher your Forex trading margin becomes the greater your risk is.

Lets look at an example of using leverage and margins.Lets say the current rate for the British pound to US dollar on the Forex market is GBP/USD 1.7100.

In order to purchase one British pound you need .71 USD. If you think the US dollar is going to increase in value against the British pound you might sell enough of the British pounds to purchase 0,000 USD. Now lets say your broker deals in lots of ,000 USD, this trade would require 10 lots.

Now you need to wait for the price of the USD to increase. A day or so later you find that the price had increased to GBP/USD 1.6600. The dollar value has increased and now the pound is only worth .66.

Now you sell your dollars and buy pounds again, your gross profit is 2.9% before you deduct the spread. 2.9% of 0,000 equals ,900, this would be considered an excellent trade.

How many of us have 0,000 cash laying around that were willing to use to trade on the Forex exchange market. So this is where Forex margins come into the picture. Because you are either purchasing or selling different countries currency at the same time, you only have to have enough money in your account to cover any loss that the dollar might make if it declined instead of increasing against the pound.

And when you made the trade you would set a stop loss in place that would limit the loss, so with this in mind you might need only ,000 in your account to complete this 0,000 trade. Your broker would be guaranteeing the other ,000.

Today a lot of the brokers now operate what is known as a limited risk amounts if you get this type of account, the software or robot as many call it will automatically close the trade if the funds in your account drop to a certain percentage.

This helps prevents a margin call which for many can be disastrous this means that your account can not cover the loss and you will need to add more cash to it.

But if you’re using a Forex limited risk account this will reduce the possibility of this ever happening. Either using your own robot or the broker’s software to control your trading account will help prevent you from losing more than you have in your account.

Using leverage in Forex trading is so common that before long you will do it without thinking about it. But you need to always keep in the back of your mind the risks that are involved.

Remeber keeping leverage low is the safest way to go and you may never want to consider going to the maximum Forex margin that you’re allowed.

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