Forex Margin Trading – What You Need to Know About Leverage

There are several methods to apply leverage through which you can increase the actual purchasing power of your 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 certain percentage within a set period of time, and this is what makes this method viable. In practice, you are able to trade on the margin by using just a small amount, which would cover the difference between the current price and the possible future lowest value, practically loaning the difference from your broker.

The concept behind Forex margin trading can be encountered in futures or stock trading as well. However, due to the particularities of the exchange market, your leverage will be far greater when dealing with currencies. You can control as much as up to 200 times your actual account balance – of course, depending on the terms imposed by your broker. Needless to say that this may allow you to turn big profits, however you are also risking more. As a rule of the thumb, the risk factor increases as you use more leverage.

To give you an example of leverage, consider the following scenario:

The going exchange rate between the 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 rise, and buy $100,000. A few days later, the going rate is GBP/USD 1.66 – the pound sterling has dropped, and one pound is now worth only $1.66. If you were to trade your dollars back for pounds, you would obtain 2.9% of your investment as profit (less the spread); that is, a $2,900 profit from the transaction.

In reality, it is unlikely 비트코인 that you are trading six digit amounts – most of us simply cannot afford to trade on this scale. And this is where we can use the principle behind Forex margin trading. You only need to provide the amount which would cover the losses if the dollar would have dropped instead of rising in the previous example – if 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 – which means that they handle accounts which automatically stop the trades if you have lost your funds, effectively preventing the trader from losing more than they have through disastrous margin calls.

This Forex margin trading method of using leverage is very common in currency trading nowadays. It’s very likely that you will do it in the near future without so much as a single thought about it – however, you should always keep in mind the high risks associated with a lot of leverage, and it is recommended that you never use the maximum margin allowed by your broker.

Zachary Bradford enjoys testing and writing about new financial products on his blog BradfordReviews.com. With all the options available it is his goal is to make it easy to find the best solution. He also enjoys rock climbing and the outdoors.

 

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