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Margin Trading: How does it Work in Forex Trading?

With Margin trading in Forex we mean some borrowed money that enables the trader to trade with much more money that he has invested in fact. In other words, Margin trading is a great opportunity provided in Forex trading to earn big money

The leverage ratio provided by different Forex brokers varies from 1:10 up to 1:1000. Speaking about leverage, to explain it simply, leverage is some amount of money that the broker company lends to the traders. The advantage of leverage is that the trader needs to provide only a very small amount of money which is equal or bigger than 1% of the whole sum. So far, the broker provides the remaining 99% of the whole sum.     As a matter of fact, the amount of money the trader can borrow is restricted. So in order to maintain the borrowed money longer, it is required that the trader keeps the minimum balance on his/her account. If the trader doesn’t follow the requirements it is most possible that the margin falls below maintenance margin level which will result in margin call.

Margin Trading Sample

Let us consider a sample of a margin trading. Let’s assume a trader starts with deposit of 10.000 USD opening a position of 200.000 EUR/USD with the rate of 1.7035. This means the trader wants to buy 200.000 EUR and for this purchase he should pay 340.700. The 1% of the credit is 3407 US dollars. And this is what is called Margin.

The 6593 US dollars in the account will be considered to be the FREE Margin, this is the money amount that the trader can use in order to start the trade.

Going on with this two possible variants of the deal: First, if the deal in trade is positive and the exchange rate of EUR/USD increases up to 1, 7105, the trader makes a decision to close a deal by selling 200.000 EUR/USD at the rate 1,7105. So he will get 342.100 US dollars, the difference of 1400 US dollars will be added to the trader’s account as a profit. Concluding these arithmetic’s, the trader will get 7993 US dollars on his account. Contrary to this, if the deal is not profitable, the trader can lose these 1400 US dollars and the total amount of money on the traders account will accordingly be reduced by 1400 US dollars and will result in 5193 US dollars.

Margin Trading Advantages

  • Possibility to trade with minimum amount of money
  • In case you are on the way to lose all your money the Margin Call will save the minimum investments.

Margin Trading Disadvantages

Margin trading is high in risks and every trader should acknowledge the risky factors before deciding to trade on margin. So to say, margin trading allows the trader to complete speculative operations.

Article by David Taylor

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