Forex Margin Trading – What you ought to Know About Leverage

There are several solutions to apply leverage through which it is possible to increase the actual purchasing power of your investment, and Forex margin trading is one of them. 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 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 your current price and the possible future lowest value, practically loaning the difference from your broker.
The idea behind Forex margin trading could be encountered in futures or trading as well. However, because of the particularities of the exchange market, your leverage will be far greater when coping with currencies. You can control around up to 200 times your actual balance – of course, based on the terms imposed by your broker. Obviously that this may allow you to turn big profits, nevertheless, you are also risking more. As a rule of the thumb, the chance factor increases as you utilize 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 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. If you were to trade your hard earned money back for pounds, you would obtain 2.9% of one’s investment as profit (less the spread); that is, a $2,900 profit from the transaction.

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In reality, it really is unlikely that you are trading six digit amounts – many of us just can’t afford to trade on this scale. Which is where we can use the principle behind Forex margin trading. You only need to provide the amount which may 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 rest of the $97,100 for the purchase.
Currently, many brokers deal with limited risk amounts – meaning that they handle accounts which automatically stop the trades assuming you have lost your funds, effectively preventing the trader from losing more than they have through disastrous margin calls.
This Forex margin trading approach to using leverage is quite common in currency trading nowadays. It’s very likely that you’ll do it in the near future without so much as a single considered it – however, it is best to bear in mind the high risks of a lot of leverage, and it is recommended that you never utilize the maximum margin allowed by your broker.