Margin Makes Foreign Exchange Trading Exciting
One of the key factors leading to the popularity of foreign exchange trading is "margin". Without this factor, most forex trading would be well outside the realms of average investors. But what precisely is margin?
Margin is a factor which allows foreign exchange traders to control large sums of currency while making relatively small deposits. This works by establishing a "margin Account". This has to be conducted through a forex broker and it will enable the new trader to control what they call currency lots. A currency lot is generally worth in the region of $100 000.
The leverage the trader gains from the margin account is expressed as a ratio. For instance a leverage ratio of 100:1 means the trader is able to have access to control over 100 x their deposit amount of forex assets. So essentially in a $100 000 standard forex lot with a 1% margin will require a deposit of $1000.
The trader is able to access large profits when trading on a margin, but this also means that losses can also be incurred. Money likes speed so although the risk of losses exists, safeguards are generally put in place to limit these losses. A broker will generally terminate any transaction before it goes above the deposit margin, but in some instance more than the initial deposit may be lost.
Forex is actually traded in smaller units than cash is. For example the US dollar trades down to four decimal points. For instance instead of $1.42, it will ready as $1.4238. The smallest unit is known as a "pip". When trading US dollars in a value of a $100 000 lot, your pip is valued at $10. If the price of the dollar were to change from $1.4238 to 1.5238, it is a 100 pip difference and while this loss or profit of $10 may be meaningful to a tourist, it means very little to an investor. This example indicates how margin is able to increase potential profit or loss. - 23305
Margin is a factor which allows foreign exchange traders to control large sums of currency while making relatively small deposits. This works by establishing a "margin Account". This has to be conducted through a forex broker and it will enable the new trader to control what they call currency lots. A currency lot is generally worth in the region of $100 000.
The leverage the trader gains from the margin account is expressed as a ratio. For instance a leverage ratio of 100:1 means the trader is able to have access to control over 100 x their deposit amount of forex assets. So essentially in a $100 000 standard forex lot with a 1% margin will require a deposit of $1000.
The trader is able to access large profits when trading on a margin, but this also means that losses can also be incurred. Money likes speed so although the risk of losses exists, safeguards are generally put in place to limit these losses. A broker will generally terminate any transaction before it goes above the deposit margin, but in some instance more than the initial deposit may be lost.
Forex is actually traded in smaller units than cash is. For example the US dollar trades down to four decimal points. For instance instead of $1.42, it will ready as $1.4238. The smallest unit is known as a "pip". When trading US dollars in a value of a $100 000 lot, your pip is valued at $10. If the price of the dollar were to change from $1.4238 to 1.5238, it is a 100 pip difference and while this loss or profit of $10 may be meaningful to a tourist, it means very little to an investor. This example indicates how margin is able to increase potential profit or loss. - 23305
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posted by Mr. Forex at
12:53 AM
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