Trading in the currency market in most cases requires you to trade with a forex margin account. Trading on margin basically means that for a relatively small amount of your money, called the margin, you can trade a lot of your broker’s money on the market. This very unique leveraging opportunity that doesn’t exist on most other markets.
The standard leverage ratio is 100:1. That means for each $1 you have on deposit, you can trade up to $100 of your broker’s money. So if you minimum deposit requirement is $1,000, then your trading power is $100,000.
To calculate the profit and losses associated with a specific position, traders should use a forex margin calculator as a quick and easy way to find out how much they gained or lost. In addition, tools like these should be used to measure potential profit and losses before a trade is executed. It can be quite difficult to do all of this in your head. There are many good and free calculators online. In addition, most trading platforms offered by your forex broker should have this function incorporated into their system.
Benefits of Forex Margin Trading
Essentially, this power of leverage allows you to make significant profits off of minor fluctuations in price. During any given trading day, an exchange rate may fluctuate by merely fractions of a penny. Now unless you have a million dollar account, you won’t be able to make much of a profit off of fractions of a penny changes. Having a forex trading margin allows small traders to enter the forex market. Otherwise it would be a field only for traders with large amounts of capital or institutional traders.
Trading on margin is a part of virtually all forex trading strategies and needs to be clearly understood before any trades are made. You have to know how this plays out in real life as you begin to trade or you won’t really understand how everything works.
Risks of Margins
As much as there is profit making power in using leverage, there is also a corresponding risk as well. The forex broker will automatically close you out of a trading position if you come close to losing more than your minimum forex margin level. It is a process called a “margin call“. This allows a broker to give you leverage without putting themselves at risk. In addition, it’s an added benefit for you as the trader so that you won’t lose more money than you actually have.
Trading on margin is a highly risky activity. It is not suitable for everyone. Before any trader goes into this market with a margin account, he needs to assess his own financial situation, investment goals and clearly understand the risks involved being in this market. A financial advisor should be consulted with before entering into any trades.
It’s very important to first practice currency trading on a forex demo account before you use real money, especially for new traders. The power of trading on margin will cause you to lose money just as fast as you gain it. So practicing heavily to get comfortable with the trading environment is crucial.