All about the Forex Margin Trading

In forex, margin trading is the strategy of borrowing money to buy stocks. After finding a reliable broker and securing a margin account, a trader may begin accumulating up to 50% of new resources. Provided he keeps his end of the bargain (i.e. follow rules specified by the broker), his loaning privileges won’t be revoked. For instance, should a trader have $5000 in his margin account, he is entitled to borrow up to 50%, enabling him a total of $10,000. He may choose to use the money all at once or put it aside for later.

The Margin Call: Why Is It Dreaded?

The Two Types of Margins

1.    Initial Margin
-    the highest initial borrowable amount
2.    Maintenance Margin
-    the required amount to be maintained

The margin call is issued by a broker should a trader either reach the initial margin or back down the maintenance margin. It is dreaded (especially in volatile markets) as once given, it legally obligates a trader to add more funds to his margin account. Should he fail to do so, his only other option is to surrender collaterals and liquidate his position which means, he needs to terminate the contract.

Paper Losses

In margin trading, should things go against expectations, a trader’s loss remains to be paper loss (unrealized loss until collaterals are used and securities are sold). Say, he lost a grand sum by having taken part in a wrong investment, he may still salvage his situation. With this, he is able to justify previous mistakes before being officially fined by his broker. In time, employing the best strategies may allow him to start fresh.

The Plus Side

As in forex, it’s all about leverage; margin trading grants a trader the chance to buy way more stocks than he could normally afford. It amplifies abilities as well as the prices of stocks. Especially after sorting his deals, establishing an income-generating business from the borrowed money will be easy. Also, should he choose the right stock-based investment, the margin trading strategy dramatically increases his profit.

The Down Side

Despite a loss being declared unofficial until no collateral is used and no security is sold, margin trading is only meant for an advanced forex trader. Leverage may be advantageous but it still is a double-edged sword. Should there be supposedly a minor 5% loss, the stakes become much higher. As profits are exaggerated, commissions and interest come into the equation and the small amount can reach up to 15%.

Smart Use of Forex Leverage to Beat the Odds

Leverage in general means one’s capacity to utilize something small to control something huge. Forex leverage, on the other hand, is a tool used in Forex trading and indicates that you can control a bigger amount in the market with only a small capital or a much smaller deposit. Among the most favored aspects of Forex trading is the idea of leverage. For example, if a brokerage company in this industry offers a 60:2, leverage this indicates that for every two dollars in an investor’s account, he may be allowed to trade sixty dollars on the trading market.

Advantages of leverage for the trader

With this, a trader can do bigger trades that may not be possible without leverage. This can result to immense returns for the investor’s account. For instance, your trading account contains a thousand dollars. You can plan on placing a thousand dollar trade on the Forex market. More or less, the pip value is going to be ten cents. Once the trade shows great potential moving for 10 pips, you can gain a dollar or 0.1 percent profit.
If you plan on using a leverage of 10:1 in that particular trade, you will have a thousand dollars in your trading account; however, the trade value is equivalent to ten thousand dollars. On this level of trading, the estimated value of pip is a dollar for every pip. Hence, a 10 pip movement will provide a ten dollar profit or a 1 percent return. Contrastingly, frequently the use of leverage is disregarded due to the fact that it is capable of being either a setback or an advantage. Forex trading with leverage raises your gains as well as your losses.

Leverage provides options

The major advantage of leverage is its capability to present choices. It the market becomes unpredictable, leverage is less recommended if the markets are not moving fast, more leverage may be used. Everything is contingent on the extent of risk management you are willing to make use of. The decision to use leverage is actually dependent on the decision of the trader.

On the whole, it is imperative to make careful use of leverage in this realm of trading. Forex brokers offer traders leverage merely for the reason that this increases the broker’s bottom line whether the trader gains or loses. Most Forex traders are not successful in this regard and too much use of leverage is among the causes of their failure.

Content participants: Johni from Admiral Markets Australia and Agbulos from MTrading philippines Participated in this post.