Online Forex Trading
- Understanding Margin and Leverage

Online Forex Trading

Online Forex Trading - Understanding Margin and Leverage

Being able to trade on margin is one of the greatest advantages of forex trading. You can purchase large quantities of currency while only putting up a small fraction of the full value.

You may hear some people refer to "leverage trading" and other to "trading on margin". In forex trading, they refer to the same thing, just in different terms.


Leverage is usually quoted as a ratio such as 100:1. This simply means that you can trade 100 units of currency while only putting up 1 unit. In other words you would only need to put up $1,000 in order to trade $100,000.


Margin is the same thing, just from a different point of view. Margin is generally quoted as a percentage such as 10%. In this example you would be able to trade $10,000 of currency while only putting $1,000 down.

Successful forex traders use margin to explode their profits. Since the value of a single pip is quite low, you have to trade large lots of currency to make a profit.

Huge Reward / High Risk

Being able to make leveraged trades enables small investors without a lot of capital to make big profits. However, margin cuts both ways and you must use it wisely or you'll find yourself broke in no time.

When you first open an account with a forex broker you will be required a minimum amount of funds into the account before you can trade. The minimum account value varies from one broker to the next.

When you make a trade, part of your account balance is earmarked as the initial margin requirement for that trade. Let's look at an example.

You open an account and deposit $10,000 into it. You then make a trade at 100:1 leverage. You buy $100,000 of currency, but are only required to put up $1,000. So you now have $1,000 in used margin and another $9,000 in available margin.

It's important to keep track of how much margin you have available. If prices move against you, some of the $9,000 you have as usable margin will be used to compensate for your losses. If your balance falls too low, the broker will liquidate your positions and you will be hit with a big loss. This does however prevent you from losing more than you could if they left your position open and prices continued to go against you.

No one wants to receive the dreaded margin call. But you can effectively eliminate it by using stop-loss orders to cut your losses before they near the point of liquidation.


Browse Categories:
Stock Trading
Forex Trading
Commodity Trading
Options Trading
Day Trading
Technical Analysis
Real Estate Investing
Bonds Investing
Finance / Economics
For Your Trading Room
Online Forex Trading Tips
  Currency Trading  
  Introduction to Forex  
  Reading Forex Quotes  
  Understanding Pips  
  Types of Forex Orders  
  Understanding Margin and Leverage  
  Avoiding Failure in the Forex Market  
  Calculating Profit and Loss  
  Choosing a Forex Broker  
  Forex Trading vs The Stock Market  
  Forex - Fundamental Analysis  
  Technical Analysis  
  Fundamental vs Technical Analysis  
  Traits of Successful Forex Traders  
  More About Forex Trading...  
Online Commodity Trading Tips

Commodity Trading

  Intro to Commodities - Part 1  
  Intro to Commodities - Part 2  
  Commodity Exchanges  
  Financial Indexes  
  Commodity Types  
  Reading Commodity Prices  
  Commodities - Margins  
  Commodities - Leverage  
  Trading Coffee  
  Trading Silver  
  Trading Uranium  
  Trading Soybean  
  Trading Oil  
  More About Commodities Trading...  
Online Options Trading Tips

Online Options Trading

  Options 101  
  Calls and Puts  
  Options Trading 101  
  Options Trading 102  
  Options - Risk Management  
  How To Read Options Listings  
  Trading Strategies - Basic Concepts  
  Trading Strategies - Profit and Risk  
  The Greeks - Part 1  
  The Greeks - Part 2  
  Values and Prices - Part 1  
  Values and Prices - Part 2  
  More About Options Trading...  
Real Estate Investing
  Real Estate Investing  
  Getting Started in Real Estate  
  Questions To Ask Before Investing  
  Real Estate - Your First Time  
  Finding and Evaluating Property  
  Inspections Save You Money  
  Cheap Repairs, Big Profits  
  Keep Your Cash For A Rainy Day  
  Insurance and Risk Management  
  Managing Risk - Part 1  
  Managing Risk - Part 2  
  More About Real Estate Investing...