Forex Margin Trading – What you ought to Know About Leverage

There are several methods to apply leverage through which it is possible to raise the actual purchasing power of your investment, and Forex margin trading is one of them. This method basically allows you to control large amounts of money by using just a small sum. Generally, currency values won’t rise or drop over a particular percentage within a set period of time, and this is what makes this method viable. Used, you are able to trade on the margin by using just a small amount, which would cover the difference between the current price and the possible future lowest value, practically loaning the difference from your own broker.
The concept behind Forex margin trading could be encountered in futures or trading as well. However, due to the particularities of the exchange market, your leverage will be far greater when coping with currencies. You can control around up to 200 times your actual balance – of course, according to the terms imposed by your broker. Obviously that this may allow you to turn big profits, however you are also risking more. Generally of the thumb, the risk factor increases as you utilize more leverage.

To give you a good example of leverage, consider the following scenario:
The going exchange rate between the pound sterling and the U.S. dollar is GBP/USD 1.71 ($1.71 for one pound sterling). You are expecting the relative value of the U.S. dollar to rise, and buy $100,000. A couple of days later, the going rate is GBP/USD 1.66 – the pound sterling has dropped, and one pound is currently worth only $1.66. In the event that you were to trade your dollars back for pounds, you would obtain 2.9% of one’s investment as profit (less the spread); that is, a $2,900 benefit from the transaction.
In reality, it really is unlikely that you will be trading six digit amounts – the majority of us simply cannot afford to trade on this scale. And this is where we can use the principle behind Forex margin trading. You merely need to supply the amount which may cover the losses if the dollar could have dropped instead of rising in the last example – if you have the $2,900 in your account, the broker will guarantee the rest of the $97,100 for the purchase.
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Currently, many brokers deal with limited risk amounts – which means that they handle accounts which automatically stop the trades assuming you have lost your funds, effectively avoiding the trader from losing more than they have through disastrous margin calls.
This Forex margin trading method of using leverage is quite common in forex trading nowadays. It’s very likely that you’ll do it in the near future without so much as an individual thought about it – however, you should always keep in mind the high risks of a lot of leverage, and it is recommended that you never use the maximum margin allowed by your broker.

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