Prices on the Forex market do not have huge movements. Because of this, if you are starting with small capital the profits you make will not be significant. To combat this challenge, brokers are offering margin trading which increases profits made by traders.
Margin trading is the process of acquiring bigger buying power than traders would normally have. When using margin traders have to put up a fraction of the order price and the rest is covered by the broker. This gives traders the ability to open big market positions and increase potential profits.
Why is margin important for traders?
- Margin gives traders the opportunity to increase their profits
- With the help of margin trading, traders get more trading opportunities
- Margin trading is designed for experienced traders, considering the risks associated with it
- Margin trading can be a double edge sword. With big profits, traders can also lose a lot
Thorough Margin Explanation
Margin trading is the process when a trader puts up a small percentage of the market position, while the rest is covered by the broker. When doing so, traders get the opportunity to trade with assets that they were unable to do so before and increase their potential profits. Usually, the margin is around 1%-2%, which means that traders need to put up 1%-2% of the market position and the rest is covered by the broker.
Margin trading can be considered a double-edged sword. Margin trading increases potential profits, but it can also acquire big losses. If the market goes in the wrong direction traders start to accumulate losses, and if losses exceed the initial deposit of the trader he starts losing the broker’s money and goes into debt to the broker.
Example of Margin in Forex
To better understand what margin trading is and how it works, let’s look at an example of margin trading. So the trader wants to open a market position that is worth $100,000 but he does not have the funds to do so. The trader goes and uses a margin of %2 offered by the broker. What this means is that trader now has to deposit $2000 into his account in order to open the market position of $100,000, where $98,000 is covered by the broker.
FAQs on Margin trading in Forex
Should I use a margin?
Margin trading is a double-edged sword, as traders can make big profits as well as big losses. Because of this, using margin when trading is more designed for experienced traders who know how the market works and can minimize potential losses as much as possible.
How is margin calculated in Forex?
Margin is calculated in percentages. So when we see that the margin is 1%, a trader needs to put up 1% of the market position and the rest is covered by the broker. So if the trader is opening a $10,000 market position, he needs to deposit $100 in order to open the market position.