Forex Margin Trading – What You Need to Know About Leverage

There are several solutions to apply leverage through which you can raise the actual purchasing power of one’s investment, and Forex margin trading is one of these. This method basically lets you control huge amounts of money by using just a small sum. Generally, currency values won’t rise or drop over a particular percentage within a set time frame, 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 would 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 can be encountered in futures or stock trading as well. However, due to the particularities of the exchange market, your leverage will undoubtedly be far greater when coping with currencies. You can control up to up to 200 times your actual account balance – of course, according to the terms imposed by your broker. Needless to say that this may enable you to turn big profits, nevertheless, you are also risking more. As a rule of the thumb, the risk factor increases as you use more leverage.

To give you an example of leverage, consider the following scenario:
The going exchange rate between your pound sterling and the U.S. dollar is GBP/USD 1.71 ($1.71 for one pound sterling). You are 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 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 profit from the transaction.
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In reality, it is unlikely you are trading six digit amounts – many 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 merely need to provide the amount which may cover the losses if the dollar could have dropped instead of rising in the last example – when you have the $2,900 in your account, the broker will guarantee the remaining $97,100 for the purchase.
Currently, many brokers deal with limited risk amounts – which means that they handle accounts which automatically stop the trades in case you have lost your funds, effectively avoiding the trader from losing more than they 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 soon without so much as an individual considered it – however, you should always take into account the high risks of a lot of leverage, in fact it is recommended that you never use the maximum margin allowed by your broker.

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