Margin Trading in Forex: What You Need to Know
Forex margin trading is the money a trader places and maintains a trade position. Learn more with Tradehall, a meta-5 online forex broker.
It is not a transaction cost, but rather a security deposit that a broker holds while a forex trade is open. Margin is the deposit given to the broker by the trader.
Margin trading is what has made forex accessible to an individual trader recently. Before that, only big banks were trading in forex and the minimum investment or trading amounts would be in millions.
Understanding Margin Accounts
A margin account, at its principal, involves borrowing to enlarge the size of a position and is usually an attempt to improve returns from investing or trading.
Margins are needed in order to use leverage. The amount of margin requested differs from broker to broker.
A trader will offer collateral to ensure and safeguard his or her broker from any threat of credit risk.
Just remember that when you trade with large leverage, while should you win, your profits become magnified, but should you lose, your losses become amplified too. So be careful always.
Forex Margin Trading
What are forex trading margin requirements? A trader must first deposit money into the margin account before placing a trade.
The amount of deposit depends on the margin percentage required by the broker.
For instance, accounts that trade in 100,000 currency units or more, usually have a margin percentage of either 1% or 2%.
So, for a trader who wants to trade $100,000, a 1% margin would mean that $1,000 goes into the account as a deposit.
Then, the broker will provide the remaining 99%. The amount of margin depends on the policies of the firm.
Here is another forex margin trading example. Let us say if you want to buy $50,000 worth of GBP/JPY, you do not need to put up the full amount.
You only need to put up, for example, 0.5% of a portion, like $2,000 or $3,000. Again, the actual amount depends on your forex broker requirement.
In addition, some brokers require a higher margin to hold positions over the weekends due to added liquidity risk.
So if the regular margin is 1% during the week, the number might increase to 2% on the weekends.
In a margin account, a broker would use a $1,000 as a security deposit of sorts. If a trader’s position worsens and his or her losses approach $1,000, the broker may begin a margin call.
A margin call occurs when a trader’s brokerage balance has fallen below the minimum equity or forex amounts mandated by margin requirements.
In other words, the trader’s account has lost substantial sums in volatile markets.
Traders who get a margin call from his or her broker must quickly deposit more cash or securities into their accounts.
If the trader fails to top up the account according to the margin requirements, then the brokerage may have to liquidate the account or close out the position to limit the risk to both parties.
Benefits of margin trading in forex
The key benefit of forex traders using margin is the ability to leverage investments and boost their returns. Some brokers allow as big leverage as 500:1. This is not advisable, however.
This means that they can use margin trading to trade in far larger sums of currency than their principal investment would usually allow.
Unlike typical stock brokers, forex brokers do not, as a rule, charge interest on the money they put in.
A forex trader who starts with £100 as their principal investment, with a 50:1 leverage, the trader can trade £5,000 worth of currency.
So, all those present forex traders with a huge advantage when it comes to realizing gains in the market.
Flexibility and speed in trading.
- The market can move fast and some opportunities may pass before a trader can release funds.
- Margin trading allows a trader to have more liquidity to take advantage of more opportunities.
An easier way to raise finance.
- Margin trading can be a useful way to access additional funds.
Forex trading on margin is the term used for trading which is borrowed capital. Margin is the deposit given to the broker by the trader.
This is interesting because you can trade forex with real money whose value is lower than the size of the transaction. In addition, traders can open larger positions with less capital.
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