A forex trader needs to deposit a sufficient amount of money in his margin account to begin his forex position. That amount of money is known as margin. Forex margin trading is risky because you can make either huge gains or huge losses.
How it works?
Before starting margin trading, you need to create a margin account with a broker. Then you have to deposit money in that account. Margin trading of 1% means you need to deposit $1,000 for trading on $100,000. If you deposit 1% of the capital, remaining 99% will be provided by your broker. The broker will charge an interest while you make gains doing margin trading.
Advantages of Margin Trading:
A trader can increase his gains with the same account balance.
A trader can take the advantage of short-term market opportunities.
How is forex margin trading different from share trading?
There are a few differences.
Forex trading offers up to 50 to 1 margin when share trading offers 2 to 1 margin.
In case of share trading, a trader pays his brokerage firm interest on the borrowed amount. But as a forex trader, you don’t have to pay interest on the leverage.
What are margin requirements for forex trading?
Margin requirements change every month for price fluctuation. They are policies which traders should keep in their minds at the time of trading activity. There are different types of margin requirement in forex trading.
Initial margin requirement forex:
This is a minimum amount to open a position for buying and selling.
Maintenance means a certain amount which is required to keep an open position. If the current price is higher, you can earn profit. If the amount goes below yesterday’s closing, you can lose money.
This type of margin covers expected drop in the value of the trader’s position.
If your margin account drops below the maintenance, you will get a margin call. It is issued by the broker. Then you will have only two options. You can raise the amount of margin to initial level. Other than that, you can close your position as well.
A Few Tips for Doing Forex Margin Trading Correctly:
If you do margin trading incorrectly you can lose a large amount of money. So, you need to learn the styles, strategies, techniques of margin trading to do it properly.
To earn huge profits, you should have sound knowledge of margin trading in foreign exchange. You capabilities include fundamental, technical and analytical skills.
Fundamental analysis is a system of interpreting forex data from graphs, charts and maps. Forex data providers give this type of information where generally, they provide data about forex currencies.
Technical analysis is the system of interpreting foreign exchange data from foreign currency alerts and signals. These data sources are all about numerical calculations and mathematical equations. Technical skill is used to study rapid changes in forex markets and how they affect the trade.
As you have understood the meaning of forex margin trading, you are ready for forex trading. Always be cautious at the time of trading.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.