While practicing trading in the forex market, have you ever come across the terms forex margin and leverage? If not, then we must aware you that margin and leverage are two most important factors in the forex business without which a trader cannot operate his account in the trading market. Both beginner and expert traders must have a clear conception about these two factors.
If you are thinking of investing in the forex business, you must have faced this question what is forex leverage and margin? To start your journey in forex business in a smooth way, you must gain knowledge about it, and here in this article, you will come to know about various facts and facets related forex margin and leverage. So, here you start with the definition first.
What is margin in forex?
Margin is basically the amount required to open up a forex position. It is neither a fee nor a charge for your account. It is the amount that ensures you are having sufficient balance in your account related to your current position in the market. The margin is almost opposite of leverage.
To define it in simple terms, let’s cite an example here – In order to control $100,000 position in the forex market, your broker needs to set aside $1,000 from your account which means you are now controlling $100,000 positions with $1000.
The margin refers to the amount required to maintain a faith position for opening up a trading position with your broker. The margin account is mainly used by the broker to maintain your position in the trading business.
After margin, now it’s time to check out the role of leverage in the forex market.
What is leverage?
As it is already mentioned leverage is almost opposite of margin, it allows a trader to control a large trade size. In the forex market, traders mainly use it as a way to expand their returns. However, this position is filled with stress and risks because a trader may also incur loss while using leverage tool. Therefore, a trader must know how to control this tool before using it for maximizing profit.
For example, suppose a trader chooses one mini lot of CAD/USD to trade. This trade is almost equal to controlling $10,000 as when the trade is 10 times larger than the trader’s account; the leverage ratio will appear as 10:1. If the trader bought 20,000 units of USD/CAD, the leverage ratio of the account would be 20:1.
Hope from these above definitions, you understand the role of forex margin and leverage. However, you may not be satisfied with that much of information. So, here, you will get some frequent questions and answers asked by other traders. Let’s check out.
Is it possible to trade on margin or leverage in forex?
Yes! It is possible which means you are not required to deposit cash for maintaining your position in the trading market.
Is margin in forex completely different from stock trading
Yes! That’s a good question. Margin in forex is different from stock trading.
Are there any disadvantages associated with forex?
Since leverage allows you to control a large amount of capital, it also increases the chances of a significant amount of loss.
Hope you get enough information on what is forex leverage and margin from the above discussion. If you would like to ask any question related to this field, feel free to write in the below comment section. We will be delighted to answer your queries.