Currency Margin Trading: Earn More Profits With Less Putting Into Use Your Broker's Capital
Foreign exchange margin trading is a way of using leverage to boost the purchasing power of your trading funds. Leverage in fact means using a small amount to control a much larger amount. This is possible because it is not likely that the rate of a currency will change by more than some percentage points over a short time. So you may put a few hundred dollars in your brokerage account to trade on the margin - the amount that you think the rate could change. Your broker will in effect provide you the difference.
Trading on margins is also known in stock and commodities trading, but because of the special nature of currencies, you may apply a much higher leverage in the foreign exchange markets. Depending on your broker's terms, you may be able to trade with 50, 100 or even 200 times your trading capital.
This can produce huge returns if you are winning, but it can also result in big losses if not. Usually, the more leverage you use, the riskier your trading is.
We can understand leverage and margins through an example.
Imagine that the current rate on the British pound to US dollar currency market is shown as GBP/USD 1.7100. So to buy one British pound you would need $1.71. If you forecasted the price of the dollar to increase against the pound you may decide to sell enough pounds to buy $100,000. If your broker used lots of $10,000 each, this would be 10 lots. Then you would sit back and wait for the price to go up.
A couple of days later you might find that the rate had moved to GBP/USD 1.6600. Sure enough, the dollar has risen and the pound is now worth only $1.66. If you sell your dollars now and buy back into pounds, you will have made a profit of 2.9% less the spread. 2.9% of $100,000 is $2,900, so that would be an outstanding trade.
But most of us do not have $100,000 spare cash that we can use to trade on the currency markets. So here is where the essence of margin trading comes into play.
Since you are buying and selling various currencies at the same time, your own capital only has to cover any loss that you would possibly make if the dollar falls instead of rising. And you would put a stop loss to limit that loss, so $1,000 could be all you needed to have in your account to make this $100,000 trade. Your broker guarantees the other $99,000.
Actually most brokers now operate limited risk amounts where the account will automatically close out the position if whatever funds you have in your account are lost. This prevents margin calls which can be destructive for a trader because they mean that you can lose more than you have. But with a forex limited risk account that is impossible. The broker's software that you use to control your account will not let you lose more than your deposited funds.
Using leverage in this way is so popular in forex trading that you will soon do it without even thinking about it. Still it is important to bear in mind the risks. Lower leverage is always safer and you may never want to go to the highest degree forex margin that your broker would allow. You may also reduce your risk by using highly reliable forex signals. There are many forex signal providers available online. But keep in mind the fact, that not all forex signals are winners, so don't risk too much on any single position.
Currency Margin Trading: Earn More Profits With Less Putting Into Use Your Broker's Capital
Trading on margins can lead to big profits if you are successful, but it can also mean big losses if not. In general, the more leverage you use, the more risky your trading is.
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