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%.