Margin Makes Foreign Exchange Trading Exciting
Margin is one of the key features that makes foreign exchange trading so exciting a prospect. Without a factor like margin, trading in this area would be completely out of reach for the ordinary man in the street who wants to invest in this area. However, what exactly does "Margin" mean?
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.
Your borrowing power in the margin account allows you leverage which is expressed in the form of a ratio. For example a leverage ratio of 100:1 allows the trader to control foreign exchange assets of 100 times the amount of their deposit. This means that with a 1% margin, a standard lot of $100 000 may be controlled with a deposit of $1 000.
Trading on a margin means that the broker is able to have access to very large profits. But as in all methods of investment there is risk too, so by the same token losses can be made. But reward does after all favor the brave. There are safeguards available that can limit the risk of losses and a broker will terminate a transaction which goes above the deposit margin. However it is still possible to lose more than the original deposit amount even if a small change in foreign exchange is experienced. By the same token, so can large profits be made.
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. - 23196
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.
Your borrowing power in the margin account allows you leverage which is expressed in the form of a ratio. For example a leverage ratio of 100:1 allows the trader to control foreign exchange assets of 100 times the amount of their deposit. This means that with a 1% margin, a standard lot of $100 000 may be controlled with a deposit of $1 000.
Trading on a margin means that the broker is able to have access to very large profits. But as in all methods of investment there is risk too, so by the same token losses can be made. But reward does after all favor the brave. There are safeguards available that can limit the risk of losses and a broker will terminate a transaction which goes above the deposit margin. However it is still possible to lose more than the original deposit amount even if a small change in foreign exchange is experienced. By the same token, so can large profits be made.
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. - 23196
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Foreign Exchange Trading can be hazardous if you don't do your due diligence. For more information concerning Online Forex Trading click on the links included in this text.
posted by X - Men @ 12:56 AM
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