The success of the FOREX market as a whole is made possible by margin. Without this important idea, the average investor would not be able to do anything in FOREX. So, what exactly is a margin?
Trading With A Margin
Set up a margin account if you want to trade on the margin. You can start trading large amounts of currency with a deposit that is not too big. By opening a margin account with a FOREX broker, you can borrow money from the broker to control currency lots that are usually worth $100,000. The amount of money you can borrow with the help of your margin account is the leverage. 100 - 1 means that you can control $100 worth of money with just one dollar.
- More money in the bank Also, Losses
You might be able to figure out that a $1,000 investment will give you control over $100,000. To do this, you have to borrow money from the broker, and if you make a mistake, it could cost you a lot. There is a chance that the trader will lose more than he put in. Most of the time, brokers will end a deal that lasts longer than the margin deposit.
- What's good about margin trading
With exponential buying power, you have the chance to make more money. The units of FOREX currencies are much smaller than the units of cash. For example, the American dollar is traded in units with 4 decimal places. Instead of $1.32, $1.3256 is used in FOREX quotes. The pip is the name for the smallest unit in FOREX. Even a small change, like from 1.3256 to 1.3356, is worth $100.
When you work with a 1 percent margin account, you have to be very careful. Even a small change in the value of a penny can cause you to lose your entire $1,000 investment. On the other hand, if the value of a penny goes up, you could make $10,000 from it.
- Keeping your losses in check
Set up a stop loss order if you want to limit how much you lose. Stop-loss orders close your position for you if the value of the currency goes over a certain point that you choose ahead of time. One risk that people often forget about is that their broker could close their account. This could be very bad if the price of the currency you invested in suddenly goes up and you can't sell it.
