The success of Forex trading is closely linked to the margin (also called margin trading). Without margin the Forex tradingout of reach of the average investor would be. So, what exactly is now margin and how does it work?
The margin allowed the currency traders to trade large amounts of a currency with a relatively small deposit. The openingof Forex Marginkontos enables the customers to borrow money from the broker to obtain monetary amounts, which areusually worth $100,000. The borrowed money is a huge lever on the actual usage. The lever is usually a ratio expressed – aleverage 100:1 means that they can so much trade 100 times what you paid.
MarginhandelMit let a Forex standard account (1% margin) of $1,000 be thus $100,000 with a usage. Forex on marginincreased both profits and losses, and there is a risk to lose more than you originally established. But losses can be limitedwith the right protection and the Forex broker will transactions limit usually so as that the margin is not exceeded.
Advantages of margin in currency trading
As we mentioned above, to act on margin increases the purchasing power and hence the potential for increased profits.
Foreign currency exchanged in much smaller units than cash. The American dollar is, for example, traded in units up to 4decimal places. Instead of strain rates (at cash Exchange) quotes as $1,4256 are indicated by, for example, $1.42. Thesmallest unit of currency trading PIP is called a trade with $100,000, each PIP of the slots worth $10.
If the rate of the US dollar from 1,4256 on 1,4356 change, arises a difference of 100 pips, which means a gain of $1,000.Without margin, if you keep $1000 of currency, a price change from 1,4256 to 1,4356 is only a difference of $10.
This means the Forex margin increases the profit potential by a huge factor.
Risks associated with currency trading
The higher chances of winning increase also the potential risk of loss on the other side. If you’re not careful, your entiremargin soon could be exhausted. If the margin is 1% and the currency movement is running only a single cent against you,you lose $1000.
In the safest, there are also several methods to limit losses. Use stop-loss orders. These limit the maximum loss. Trailing stop-loss orders are another possibility, here run the profits, the stop price will be drawn but automatically according toyour specifications. Stop-loss orders allow easy way losses to limit it, but to make unlimited profits.
An often overlooked risk is the possibility that the Forex broker can close the position when the losses of the Marginhöheapproach. At a market trend that runs against your position, your position could be so closed, although the trend couldsoon go in the right direction. You can depositing money into your broker account in this case just in time.
Here is an example:
They sell at 1,2144 EUR/USD (you sell 100,000 EUR and buy 121.440 US dollar for this), with the expectation that the euro exchange rate falls. You have a margin of 1%, which means that the required margin is $1214,40. You have $1250 on youraccount, so $35,60 on your broker account will remain.
You buy USD/CHF at 1,2623 with the expectation that will rise in the U.S. dollar against the Swiss franc. You buy a standard lot 100,000 American dollars for 126,230 Swiss francs with a Marginerfordernis of 1% or $1000.
As expected, the dollar rises to 1.2683, where you close your position. You sell 100,000 American dollars for 126,830 Swissfrancs. Your profit: 600 Swiss francs or US $473.08 (600 francs divided by the exchange rate 1,2683).