Forex Margin Trading – What You Need to Know About Leverage

There are several methods to apply leverage through which you can raise the actual purchasing power of one’s investment, and Forex margin trading is one of them. This method basically enables you to control huge amounts of money by using only a small sum. Generally, currency values will not 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 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 trading as well. However, because of the particularities of the exchange market, your leverage will undoubtedly be far greater when coping with currencies. You can control up to up to 200 times your actual account balance – of course, with regards to the terms imposed by your broker. Needless to say that this may let you turn big profits, nevertheless, you are also risking more. Generally of the thumb, the chance factor increases as you use more leverage.

To give you a good example of leverage, consider the following scenario:
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’re expecting the relative value of the U.S. dollar to go up, and buy $100,000. A couple of days later, the going rate is GBP/USD 1.66 – the pound sterling has dropped, and one pound is currently worth only $1.66. In the event that you were to trade your hard earned money 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 that you will be trading six digit amounts – most people simply cannot afford to trade on this scale. Which is where we can use 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 last 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 – which means that they handle accounts which automatically stop the trades assuming you have lost your funds, effectively avoiding the trader from losing more than they will have through disastrous margin calls.
This Forex margin trading method of 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 thought about it – however, it is best to 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.

Author: Muhammad Sajid

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