Articles

Few Essential Facts Regarding Margin in Forex Trading.

by MD Ashik Finance & Economy Analyst

When you first get involved in Forex trading, there will be a variety of terms that you may come across.

One of these requirements is the "margin". Far from intimidating, margin only the amount of money you have to contribute to open new trades (positions).

Forex trading usually involves dealing with large amounts of currency in the case of "a lot". 1 USD standard lot, for example, is $ 100,000.

You do not need to put the overall amount of capital on your own, this is where the margins come into play.

Here I'll go into more detail about what the margin is, how the Forex margin trading in the works, and some things you should look out for.

What is a Forex Broker Margin Profit from it?

It is a common misconception among some new Forex traders. the margin does not cost anything, and the best Forex broker in the industry did not make any kind of profit margin in it.

All margin with a Forex broker is to ensure that a number of your own funds set aside to help cover the costs of damages you can make in your position have been opened.

This margin effectively leverages the key to enjoying your Forex broker provides.

Analyzing the situation at a deeper level, while Forex brokers do not directly profit from the margin, they are not directly benefiting from giving you this opportunity to engage in margin trading.

This is something that we can see in the following sections by giving a few simple examples.

How Broker Benefits of Margin

Although not directly profit from the margin, the broker can obtain some indirect benefits. The first is that simply put, margin to make it easier for you as a merchant to get involved in the Forex market.

While there are still risks involved, of course, the broker may encourage you to trade by making it as easy as possible, the more you tend to get involved.

The main reason both are viewed brokers collect indirect benefits of margins is the fact that when you trade more, and with a larger amount, they can earn additional commissions and may profit from the markup on the deployment of Forex and other markets outside of Forex also that they may be giving trade.

In summary, then, the main benefit to the broker when it comes to margins in Forex trading is that you will be better in terms of frequency and volume.

Knowing and Understanding Margin Level of Your Broker

As mentioned, the margin is the number of your available funds to be held against your open trades. When you open more positions, this number continues to increase.

These funds are then essentially locked-in by the broker to secure your position known as your used margin, while funds are still available can be referred to as the margin available, or available equity.

We can then use these two numbers together in the following formula to calculate your current margin level:

Equity / Used Margin x 100 = Margin Level.

As a Forex trader, it becomes very important to know this number did you engage in margin trading.

This is because most of the top Forex brokers will require your margin level is at least 100% or more to avoid a margin call situation. Therefore, you must make sure to keep an eye on this as you open a new position.

Example:

If you deposit $ 1,000 in a Forex trading account and continue to open one position, the typical broker may require $ 50 margin (this can be as low as $ 33 with CySEC regulated brokers, and even as low as $ 2 with a few others). After the above calculation:

Equity ($ 1,000) / Used Margin ($ 50) x 100 = 2000% (Margin Level)

In this case, then you are still well within the level of a healthy margin, open only a few smaller trade though, and this number could change quickly.

What is a Margin Call?

The first important point to note here is that many top forex brokers often have what they call "negative balance protection".

This means that even before you get into the situation of having a margin call, your position may be closed automatically by the broker.

A margin call occurs when your margin level falls below 100%. What this basically means that you no longer have enough funds in your account to cover margin requirements on your open positions.

In this case, you will usually be presented with several options, you can close some of your open positions, or you can deposit funds into your account. In both cases, this may be a situation that you would prefer to avoid through careful risk management.

Pros and Cons of Margin Trading

Margin trading can open up great possibilities for you as a Forex trader to engage in the market to a much higher level than you can with just your own funds.

It also means that you can work well to diversify your portfolio with a number of investments in various markets.

Beyond this, margin trading means you can always be in a position to move in the Forex market if you see an opportunity.

It is also worth remembering though, that as the largest trading market in the world by volume, the Forex market can move very quickly.

Measured in pips, these movements may seem small and insignificant. If you are involved in margin trading though, you must remember that you are a very much strengthened position.

This means that even a small movement in the price of assets, cool big changes mean in your position.

The best advice you can notice is to take the chance that the margin of gifts, but still pay attention and have a strong risk management strategy in place.

Also read: Go Fast and Secure With Automated Trading - 2020



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About MD Ashik Innovator   Finance & Economy Analyst

33 connections, 0 recommendations, 99 honor points.
Joined APSense since, June 23rd, 2019, From Khulna, Bangladesh.

Created on Jan 15th 2020 00:21. Viewed 421 times.

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