Basic Forex Trading - What Is Margin and Leverage?

By: Amar Mahallati

Because you can trade on margin with forex trades, you have one of the greatest advantages over other traders. This means that you can purchase large quantities of currency but only put up a fraction of the value yourself.

Some people call this "leverage trading," while others call it "trading on margin." With forex trading, they refer to the same thing in different terms.

Leverage usually quoted as a ratio, such as 100:1.

What this means is that you can trade 100 units of currency but only put up one unit yourself. Alternatively, this means that you only have to put up $1000 in order to trade $100,000 worth of currency.

Margin is the same thing, from a slightly different point of view. Margin is generally quoted as a percentage, such as 10%. In this case, you can trade $10,000 of currency while you only put $1000 down.

If you're a successful forex trader, you can use margin to greatly increase your profits. Because the value of just one pip is quite low, you have to trade a lot of currency to make a profit.

Because you can leverage trades in this way, you can make big profits even if you don't have a lot of capital. However, margin can hurt you as well because it can cause you to go into debt very quickly.

When you open an account with a forex broker, you'll need to deposit whatever the minimum amount of funds required are into your account. This varies from broker to broker. Part of the balance you deposit is earmarked as your initial margin requirement for that particular trade.

For example, let's say you open an account and deposit $10,000 into it. If you can make a trade at 100:1, you can buy $100,000 worth of currency with just $1000 down. What this means is that you have $1000 in "used" margin and another $9,000 in "available" margin.

Now, it's important to note that you need to keep track of how much available margin you have. If you somehow lose money or prices move against you, some of the $9,000 available margin you have will be used to compensate for your loss.

If your balance goes below a certain amount, the broker will liquidate your position and you will have to deal with a big loss. Even though this seems like a bad position to be in, though, this does protect you from losing even more if the broker had left your position open and prices continued to move in the direction opposite to what you had anticipated

Therefore, even though no one wants to get that margin call, you can help make sure it doesn't happen by using stop-loss orders so that you can cut your losses before you get to the point of being liquidated.

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