When a forex trader or an investor uses a forex trading margin account, he is actually borrowing against his capital to increase the probable return on his trades. An investor would use a margin account when he wants to invest by using the leverage of loaned capital to control a larger position. This would otherwise be impossible with own capital.
If you want to trade on margin in foreign exchange market, you need to find a forex broker who offers such services. With the help of margin trading, you would be able to buy and sell currencies worth higher value than the amount in your forex account. Forex trading margin helps you take advantage of relatively smaller exchange rate fluctuations. If you have $1,000 in your forex account, and you trade with margin of 1% then you would be able to trade up to $100,000. This 1% of margin corresponds to a 100:1 leverage.
How To Trade On Margin
Trading on margin is nothing but taking a short term loan from your forex broker. Before you can start trading on margin, first you have to set up a forex trading margin account with a broker. The next step requires you to deposit money in this account. Generally, for margin trading of 1% or 2% and trading up to $100,000, the broker would ask you to deposit $1000 in your account. This way, basically, you are providing just 1% of your trading capital, the rest 99% is provided by your forex broker. As such there is no interest paid on the borrowed capital, but for the roll over positions – positions that are not closed before the delivery date – the broker would charge an interest.
Pros And Cons Of Margin Trading
One of the biggest advantages of forex trading margin is that you can increase your trading gains with the 마진거래 same account balance. Suppose you have $1000 account balance and you start a $1000 trade that gives you 100 pips each of which is worth 10 cents. This trade would give you $10 profit and in percentage terms you would gain 1%. Now if the same $1000 is being traded with margin trading then you would be able trade for a value of $100,000 and the same 100 pips would give you $1000 profit for a 100:1 leverage.
The same example can be taken to understand the disadvantage of margin trading. Suppose while using $1000 as account balance, you trade for $1000 and lose 100 pips then you would only lose $10 or 1%. However, if you do the same transaction with margin trading on $100,000 your loss would be $1000.
With the leverage of the borrowed amount, you would be able to make some quick profit but there is also higher risk of making bigger losses and you may risk the entire account balance. If you want to effectively perform forex margin trading, stick to risk management strategies and slowly master the art.