Forex Margin Trading – What you ought to Know About Leverage

There are several solutions 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 enables you to control huge amounts of money by using just a small sum. Generally, currency values won’t rise or drop over a particular percentage within a set period of time, and this is why is this method viable. Used, it is possible to trade on the margin by using just a small amount, which may 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, as a result of particularities of the exchange market, your leverage will be far greater when dealing with currencies. You can control just as much as around 200 times your actual account balance – of course, based on the terms imposed by your broker. Obviously that this may let you turn big profits, nevertheless, you are also risking more. Generally of the thumb, the risk factor increases as you use more leverage.
To give you a good 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 just one pound sterling). You’re 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 something pound is currently worth only $1.66. If you were to trade your dollars back for pounds, you’ll obtain 2.9% of your investment as profit (less the spread); that is, a $2,900 profit from the transaction.
In reality, it really is unlikely you are trading six digit amounts – many of us simply cannot afford to trade on this scale. And this is where we can utilize the principle behind Forex margin trading. You merely need to provide the amount which would cover the losses if the dollar could have dropped instead of rising in the previous example – when you have the $2,900 in your account, the broker will guarantee the rest of the $97,100 for the purchase.
Currently, many brokers deal with limited risk amounts – meaning that they handle accounts which automatically stop the trades should you have lost your funds, effectively preventing the trader from losing more than they have through disastrous margin calls.

This Forex margin trading approach to using leverage is quite common in forex trading nowadays. It’s very likely that you’ll do it soon without so much as a single considered it – however, you should always remember 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.