Forex Margin trading is one of the best ways to make a big profit in a short amount of time. It has the potential to make you thousands of dollars over night, but at the same time, it can make you lose a lot of money. Lets find out what forex margin trading is and how you can use Margin trading to make more money with less!
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 limited to Forex, in fact stock and futures 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 its a bit risky. You can make a big amount of money in a very short amount of time, if you are lucky and know what your doing, on the other hand, you can lose all of your money in an instant. Keep in mind, the more leverage you use, the more risky your trading is.
How do leveraging and margin trading work?
Let’s 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(dollar). 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 of 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.
As a Forex trader, you are buying and selling many different kinds of currencies all the time, and since your 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(dollar), you only need about a $1,000 or so. The rest of i will be covered by the broker.
Automatic account closer:
Now, in today’s Forex market, many brokers whether its your own software or an actual company, have set up a system where your account will automatically be closed if they preset amount of money in your account is already lost. That will stop you losing more money than what you have in your account.
Using leverage is so common in forex trading, and 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.