Forex Margin Trading – What You Need to Know About Leverage

There are several solutions to apply leverage through which it is possible to increase the actual purchasing power of one’s investment, and Forex margin trading is one of these. This method basically allows you to control large amounts of money by using just a small sum. Generally, currency values will not rise or drop over a particular percentage within a set period of time, and this is why is this method viable. Used, you are able to trade on the margin through the use of just a small amount, which may cover the difference between your current price and the possible future lowest value, practically loaning the difference from your own broker.
The concept behind Forex margin trading could be encountered in futures or stock trading as well. However, as a result of particularities of the exchange market, your leverage will be far greater when dealing with currencies. You can control just as much as around 200 times your actual account balance – of course, with respect to the terms imposed by your broker. Needless to say that this may permit you to turn big profits, nevertheless, you are also risking more. Generally of the thumb, the chance factor increases as you use more leverage.
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To give you a good example of leverage, think about the following scenario:
The going exchange rate between the pound sterling and the U.S. dollar is GBP/USD 1.71 ($1.71 for just one pound sterling). You’re expecting the relative value of the U.S. dollar to rise, and buy $100,000. A couple of days later, the going rate is GBP/USD 1.66 – the pound sterling has dropped, and one pound is currently worth only $1.66. In the event that you were to trade your hard earned money back for pounds, you would obtain 2.9% of your investment as profit (less the spread); that’s, a $2,900 profit from the transaction.
In reality, it really is unlikely you are trading six digit amounts – the majority of us just can’t afford to trade with this scale. And this is where we can utilize the principle behind Forex margin trading. You only need to supply the amount which may cover the losses if the dollar could have dropped instead of rising in the previous example – if you have the $2,900 in your account, the broker will guarantee the rest of the $97,100 for the purchase.
Currently, many brokers deal with limited risk amounts – which means that they handle accounts which automatically stop the trades when you have lost your funds, effectively avoiding the trader from losing a lot more than they will have through disastrous margin calls.
This Forex margin trading method of using leverage is quite common in currency trading nowadays. It’s very likely that you will do it in the near future without so much as a single thought about it – however, it is best to remember the high risks of a lot of leverage, and it is recommended that you never utilize the maximum margin allowed by your broker.