Forex Margin Trading – What You Need to Know About Leverage

There are several solutions to apply leverage through which it is possible to increase the actual purchasing power of one’s investment, and Forex margin trading is one of them. This method basically allows you to control large amounts of money by using just a small sum. Generally, currency values will not rise or drop over a particular percentage within a set time frame, and this is why is this method viable. Used, you are able to trade on the margin by using just a small amount, which may cover the difference between your current price and the possible future lowest value, practically loaning the difference from your broker.
The concept behind Forex margin trading could be encountered in futures or trading as well. However, as a result of particularities of the exchange market, your leverage will undoubtedly be far greater when coping with currencies. You can control as much as up to 200 times your actual account balance – of course, based on the terms imposed by your broker. Needless to say that this may permit you to turn big profits, nevertheless, you are also risking more. As a rule of the thumb, the chance factor increases as you utilize more leverage.
To give you a good example of leverage, think about the following scenario:
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The going exchange rate between your pound sterling and the U.S. dollar is GBP/USD 1.71 ($1.71 for one pound sterling). You are expecting the relative value of the U.S. dollar to go up, and buy $100,000. A few days later, the going rate is GBP/USD 1.66 – the pound sterling has dropped, and something pound is now worth only $1.66. In the event that you were to trade your dollars back for pounds, you’ll obtain 2.9% of one’s investment as profit (less the spread); that is, a $2,900 profit from the transaction.
In reality, it really is unlikely that you are trading six digit amounts – the majority of us just can’t afford to trade on this scale. Which is where we can use the principle behind Forex margin trading. You merely need to supply the amount which would cover the losses if the dollar would have dropped instead of rising in the last example – when you have the $2,900 in your account, the broker will guarantee the remaining $97,100 for the purchase.
Currently, many brokers deal with limited risk amounts – meaning that they handle accounts which automatically stop the trades in case you have lost your funds, effectively avoiding the trader from losing more than they have through disastrous margin calls.
This Forex margin trading approach to using leverage is quite common in currency trading nowadays. It’s very likely that you’ll do it soon without so much as an individual considered it – however, it is best to keep in mind the high risks associated with a lot of leverage, in fact it is recommended that you never utilize the maximum margin allowed by your broker.

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