How to use margin trading: a guide to making large profits using Forex.

Using margin trading, simply put, enables you to trade with what equates to borrowed money. Forex trading uses ‘lots’, and a standard lot is $100,000 although many brokers do offer ‘mini lots’ of $1000. That said, you don’t have to have $100,000 to open an account with Forex or to trade using the Forex.

Forex uses what it calls margin trading which necessitates giving your broker a ‘security’ margin – typically of .25% to 5% - which is then parlayed into trading with a much larger unit of currency. For instance, to trade with a standard lot of $100,000, your broker would need a deposit – or margin – of 1%, which equates to $1000.

Examples of this are shown below:

Time EUR/USD Value Used Margin
10:00 AM 1.4720/1.4725 $99,967 $1,033
12:14 PM 1.4578/1.4583 $99,002 $1,998
1:00 PM 1.4570/1.4575 $98,948 $2,052
5:00 PM 1.4770/1.4775 $100,306 $0

So, if you were to sell $100,000 and purchase Euros – at say, 10am – with a value of $1.4725 each, you would get 67,912 Euros. This then produces a value of 67912 x 1.4720 = $99,967.

You’ll notice that in this example, we have lost $33 immediately because of the bid-ask spread, however, assuming you now sell your Euros some hours later, maybe 5pm, and buy USD, you’ll get $1.4770 for each Euro, so that equates to 67912 x 1.4770 = $100,306. You made a profit of $306 on that day’s trading.

Margin trades, which are also called ‘gearing’, are an example of leverage trading. A relatively small amount controls – or levers – a much bigger amount. This then facilitates profit, or loss, from small changes in Forex quotes.

In order to trade with $1000 you’d be required to have more than that in your account. In our example above, we only had $1000 in our account so the following day, we could have opened showing a negative of -$33. So, if we’d have $2000 in our account, we could sell $100,000 in order to buy Euros in the morning. Our used margin in our account is now $1033 so that leaves your account like this: $2,000 - $1,033 = $967.

So, if trade moves against us, and midday the Forex shows EUR/USD = 1.4578/1.4583. Our 67912 EUR would now be worth 67912 x 1.4578 = $99,002, therefore the usable margin in our account is, $2,000 - $1,998 = $2. This would then result in a ‘margin call’, and our trade would be closed to prevent our account going into the negative. We could lose $1,998. If however, we had $3,000 in our account, then our trade could have continued.

If the trade had carried on moving against us, at maybe 1:00 PM the Forex quote reads EUR/USD = 1.4570/1.4575, our 67912 EUR would now be worth 67912 x 1.4570 = $98,948. Our used margin is then $2,052 but we’d still have $3,000 - $2,052 = $948 in our account, so we can carry on trading.

If the Euro had then recovered by 5pm, the Forex quote could read, EUR/USD = 1.4770/1.4775, we’d sell our 67912 EUR at $1.4770 each to make a profit of $306.

It’s advisable to aim to have a minimum of twice your margin in your account always. However, it’s even safer to never trade with more than 10% of your account balance at any time.

Margin % = 100/Leverage
Leverage = 100/Margin %