What Is Forex Margin Trading?Forex margin trading is a way of applying leverage - borrowed money - to increase the purchasing power of your money. Think of financial leverage in a similar way to leverage in the real world. Imagine tryig to move a heavy weight with a long pole... Leverage in these terms simply means using a small sum to control a much larger sum. This is possible because it is unlikely that the value of a currency will change by more than a certain percentage over a short period of time. This means that it can be possible to place a few hundred or a few thousand dollars in your brokerage account to trade on the margin. Your broker is in effect lending you the balance for a short time. Trading on margins is also possible in the stock market and futures trading, but because currency rates tend to move more slowly, you can get a lot more leverage in the forex market. Under certain conditions, it may be possible to control 50, 100 or even 200 times your account balance! Now that is borrowing power. This can lead to big profits if you are successful, but it can also mean big losses if not. This can be a very high-risk strategy and so is not for everybody.
Imagine that the current rate on the British pound to US dollar forex market is shown as GBP/USD 1.7100. So to buy one British pound you would need $1.71. If you expected the value of the dollar to rise against the pound you might decide to sell enough pounds to buy $100,000. The number of 'lots' bought will depend upon the trade sizes that your broker uses. A few days later you might find that the price had moved to GBP/USD 1.6600. Sure enough, the dollar has risen and the pound is now worth only $1.66. By selling the dollars and buying back into sterling, you will have made a profit of 2.9% less the spread - that 2.9% of $100,000 is a profit of $2,900 less those costs. Since you are buying and selling different currencies at the same time, your own money only has to cover any loss that you might make if the dollar falls instead of rising. To ensure that losses cannot get 'out of hand' trades can have automatic stop losses put in place. If a losing trade goes over your limits, and you want to keep the trade open, the brokerage will make a margin call. This call is actually for more funds into the account. Using leverage in this way is very common in currency trading. Soon you may be doing it without even thinking about it. Still it is important to keep in mind the risks. To read more about forex, please use the following links:
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