Margin Is Key To The Popularity Of Foreign Exchange Trading
One of the chief benefits of foreign exchange trading is having "margin" on your side. This is what makes it so exciting as well as profitable. The ordinary investor would not have access to trading in forex if it we not for margin, but what exactly is this?
Margin allows traders in forex to leverage by controlling a large amount of currency with a proportionately small amount, or what is called a deposit. Essentially a margin account has to be opened through a foreign exchange broker and the trader is then able to control currency lots. Currency lots vary in size but they generally are around $100 000.
The leverage the trader gains from the margin account is expressed as a ratio. For instance a leverage ratio of 100:1 means the trader is able to have access to control over 100 x their deposit amount of forex assets. So essentially in a $100 000 standard forex lot with a 1% margin will require a deposit of $1000.
It has to be borne in mind however that trading on margin can increase losses as well as profits. The potential is there, and is very real for any trader, to lose as much as if not more than their original deposit. It is possible to put safeguards in place to prevent this from happening. In order to limit any losses a broker generally terminates a transaction which goes beyond the deposit in the margin. However losses do occur when even a small change in a currency occurs, as do profits.
An example of how cash is traded is that it is positioned at 2 decimal places. Forex on the other hand is traded at 4 decimal places. So normal currency may be for example $1.25, and forex would stand at $1.2567. The smallest unit in foreign currency exchange is the "pip" and this on a lot of 100 000 only equals $10. This amount bears no significance to a forex trader, while it may make the average American tourist decide not to take a holiday in Aruba this year. Profits and losses are decided by far larger drops and increases in the value of forex than $10 on $100 000 and this is what makes trading in margins so exciting. - 23199
Margin allows traders in forex to leverage by controlling a large amount of currency with a proportionately small amount, or what is called a deposit. Essentially a margin account has to be opened through a foreign exchange broker and the trader is then able to control currency lots. Currency lots vary in size but they generally are around $100 000.
The leverage the trader gains from the margin account is expressed as a ratio. For instance a leverage ratio of 100:1 means the trader is able to have access to control over 100 x their deposit amount of forex assets. So essentially in a $100 000 standard forex lot with a 1% margin will require a deposit of $1000.
It has to be borne in mind however that trading on margin can increase losses as well as profits. The potential is there, and is very real for any trader, to lose as much as if not more than their original deposit. It is possible to put safeguards in place to prevent this from happening. In order to limit any losses a broker generally terminates a transaction which goes beyond the deposit in the margin. However losses do occur when even a small change in a currency occurs, as do profits.
An example of how cash is traded is that it is positioned at 2 decimal places. Forex on the other hand is traded at 4 decimal places. So normal currency may be for example $1.25, and forex would stand at $1.2567. The smallest unit in foreign currency exchange is the "pip" and this on a lot of 100 000 only equals $10. This amount bears no significance to a forex trader, while it may make the average American tourist decide not to take a holiday in Aruba this year. Profits and losses are decided by far larger drops and increases in the value of forex than $10 on $100 000 and this is what makes trading in margins so exciting. - 23199
About the Author:
Learn more about foreign exchange trading. Stop by John Eather's site where you can find out all about forex trading systems and what it can do for you.
posted by X - Men @ 12:53 AM
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