Forex Trading And Margin Margin can be a helpful tool for traders to use in forex trading because it allows for greater purchasing power of currency pairs using borrowed money. Use the tips below for an overall introduction to margin in forex trading.
If you borrow money in order to make a purchase of currency pairs you will have to understand margin. Margin requirements can be used to protect forex traders and forex brokers from big losses in the event a currency trade ends up losing money for a trader. How much money you can borrow and how much money you will have to have in your account to cover your loan is frequently represented as a ratio such as 50:1 or 20:1.
The margin requirements can vary from forex broker to forex broker and traders frequently look for the highest margin ratios so that they can put in less of their own money and borrow more of the forex broker's money. Forex companies usually do not charge interest on these loans to the trader but instead make their money from the spread, the difference between bid and ask price of currency pairs.
However, your agreement to accept a loan from the forex broker up to a certain amount based on the minimum margin requirements represented as the ratio is critical to maintain your open account. So if you agree to a 50:1 margin requirement you agree to maintain a two percent cash buffer to cover losses on your trading.
If your cash buffer drops below the margin requirements then your account will be closed to cover your losses. Therefore when traders trade using money from margin they frequently invest less than the full amount of their account to maintain a buffer and to avoid a margin call. If an investor used all the money in a margin account to make a currency pair purchase, any drop in price would mean that the trader's position would be sold and the trader would have lost his money in addition to the money loaned by the forex broker.
A margin call occurs when a trader's account balance drops below the minimum requirements of the forex trader to maintain the account as open. So if you have 50:1 leverage which requires your account to have two percent of the value of your investment available to cover losses then if your
account balance drops below the two percent balance the forex broker will close your account.
Margin rates can sometimes vary based on the currency pairs in which you are trading. More common currency pairs frequently require lower account balances than less common pairs.
Some forex brokers provide traders with warnings regarding the fact that they are nearing a margin call. However, traders should read the details of how a forex broker conducts a margin call which frequently states that even without a warning, the margin call may occur and a trader's account will be closed out if there is insufficient money to cover the minimum required funds necessary for leverage.
Traders should always pay attention to how close they are to reaching or exceeding permitted amounts of leverage in their accounts because there are things a trader can do to protect an account from being liquidated and closed. The most obvious solution for investors who see that they are exposing themselves to a margin call to prevent that margin call is to add money to their accounts to make sure they meet margin requirements.
Margin requirements that require forex investors to have more of the percentage of the money they invest in forex available to cover losses can be an instructive way for forex traders to avoid getting carried away on putting good money after bad into a specific currency pair or to invest in too many currency pairs by keeping them aware of how their currency trade performance is really doing.
The riskiness of forex trading can be exaggerated by the fact that traders can borrow money fairly easily in order to buy more than they can afford. Use the tips above to understand how margin can impact forex trading. Click Here For More Information
Published on Sep 18, 2012