Forex Margin Trading – What You Need to Know About Leverage

There are several solutions to apply leverage through which it is possible to raise the actual purchasing power of your investment, and Forex margin trading is one of these. This method basically permits you to control large amounts of money by using only a small sum. Generally, currency values won’t rise or drop over a certain percentage within a set period of time, and this is why is this method viable. Used, it is possible to trade on the margin by using just a small amount, which may cover the difference between the current price and the possible future lowest value, practically loaning the difference from your broker.
The concept behind Forex margin trading could be encountered in futures or stock trading as well. However, due to the particularities of the exchange market, your leverage will be far greater when coping with currencies. You can control up to around 200 times your actual balance – of course, based on the terms imposed by your broker. Obviously that this may enable you to turn big profits, however you are also risking more. Generally of the thumb, the risk factor increases as you use more leverage.
To give you an example of leverage, think about the following scenario:
The going exchange rate between your 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 go up, and buy $100,000. A couple of days later, the going rate is GBP/USD 1.66 – the pound sterling has dropped, and something pound is now worth only $1.66. In the event that you were to trade your dollars back for pounds, you would obtain 2.9% of your investment as profit (less the spread); that is, a $2,900 benefit from the transaction.

In reality, it really is unlikely that you will be trading six digit amounts – the majority of us just can’t afford to trade with this scale. Which is where we can utilize the principle behind Forex margin trading. You only need to provide the amount which would cover the losses if the dollar would have dropped instead of rising in the previous example – when you have the $2,900 in your account, the broker will guarantee the remaining $97,100 for the purchase.
Currently, many brokers cope with limited risk amounts – which means that they handle accounts which automatically stop the trades assuming you have lost your funds, effectively avoiding the trader from losing more than they have through disastrous margin calls.
This Forex margin trading approach to using leverage is quite common in forex 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, you should always remember the high risks of a lot of leverage, and it is recommended that you never utilize the maximum margin allowed by your broker.

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