Forex Margin trading is one of the best ways to grow your investments quickly in an otherwise volatile foreign exchange market. Margin trading allows you to make money with Forex in a way that no other Forex system can. It has the potential to make you thousands of dollars over night.
It can also cause you to lose a lot of money at the same rate. But with a keen understanding of foreign exchange market as well as margin trading you can ensure an almost guaranteed growth of your investment.
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What is Forex Margin trading
Forex margin trading simply refers to a method of applying leverage to increase the purchase power of your money. Leverage simply means having control over a large amount of money with a very small amount.
What makes this possible is the fact that the value of each currency only changes by a certain amount over a short time. That allows you to invest a couple of hundred dollars in your brokerage account for trade on the margin, which is the amount you think the price will fall. Your broker will in effect lend you the balance. But of course, the amount that you control depends on your broker and its terms. Some brokers allow 200 times your account balance.
Margin Trading is very risky
Margin trading is not an exclusive Forex trading strategy. In fact, stock traders use this method as well. But what makes margin trading in Forex unique is the fact that you can get way more leverage in the Forex market, because of currency and how it works. Of course, it’s a bit risky, you can double or triple your money in a very short span of time, if you are lucky and know what you are doing. If not, you run the risk of losing a lot of cash in a matter of minutes. The more leverage you use, the more risky your trading becomes.
How do leveraging & margin trading work?
Lets assume this – GBP/USD 1.6100. Which means you have to spend $1.61 to buy one British pound. And you knew that the dollar was going to rise against the pound. So, you decided to sell enough pounds to buy $100,000. You buy and wait for the price of the dollar to go up. A week or so later the dollar indeed rises against the pound, and now a pound is worth $1.55.
So, at the moment you could sell your dollars and make a profit of 2.9%. Since your initial investment was $100,000, your profit would be around $2,900, which is great for just a couple of minutes work.
But here is the problem; how many people do you know who have $100,000 or so laying around that they can use to trade?… You see, most of us don’t have such large amounts of money ready to be used for trading. That’s where Forex margin comes in.
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As a Forex trader, you are buying and selling many different kinds of currencies all the time, and since you’re doing that, your own money has to cover only the amount that you lose. So, for you to be able to purchase that $100,000, you only need about a $1,000 or so. The rest of it will be covered by the broker.
Automatic account closer
Now, in today’s Forex market, many Forex brokers, whether its your own software or an actual company, have set up a system where your account will automatically be closed if the preset amount of money in your account is already lost. That will stop you from losing more money than what you have in your account.
Using leverage is so common in currency trading, that most Forex trader use this methods one way or another. In fact, many traders engage in margin trading so often that they don’t even think about the risks involved any more.
Although, it’s a very profitable method, you should always keep in mind that there are risks involved. Just as you can make a lot of money, you can also lose a lot of money with Forex margin trading.