Forex Trading – Margins & Leverages

Arguably, one of the major advantages to Forex trading is the facility to trade on margins. In this way, an individual can purchase large amounts of currency with a small percentage of its value.

Forex traders call this ‘trading on margin’ and ‘leverage trading’ both of which mean fundamentally the same thing; only the phraseology differs. Leverages are usually expressed as a ratio, for example 100:1. This means that if you were to buy 100 units of a given currency, you would use only 1 unit to do so. Put another way, you could trade a value of $10,000 for an investment of $1000.

Margin trading is very similar but in place of ratios, margins use percentages. In our above example, 10% would mean you can trade to the value of $10,000. Many Forex traders trade in this way to make fast profits by utilizing the relatively low cost of a pip. Leverage trades likewise allow smaller investments, thereby opening the market to smaller investors. Caution should be advised however for as easy as it may seem to produce a quick profit, it’s similarly easy to lose a lot of money.

When opening an account with a Forex broker, you will be required to deposit a minimum amount prior to beginning trading. What this amount is will differ with each broker’s requirement so you should check before opening your account. Once that money is deposited, for each subsequent trade you make, part of the value of that money will be used as the initial margin required for your trade. For instance, if you put $10,000 into your account, then trade a leverage of 100:1, you would be buying currency to the value of $100,000 – using $1000 to do so – so you would now have $9,000 in your account.  

It’s imperative that you keep close watch on the money you have in your margin account because if you lose money on the currency you purchased, the margin fund will be used to cover that loss. If that happens, and all the money in your account is gone, the broker will then liquidate your positions and you will have to sort out the losses yourself. However, by acting in this way, your broker has protected you from further losses if things go any more awry.

Nobody enjoys margin calls and you’ll want to do what you can to avoid them, so utilize the stop-loss orders. By doing so, you’ll remove yourself from the game before your broker has to consider liquidation.