Forex trading can be very beneficial and takes skill and practice to become an expert. Forex traders utilize numerous trading tools to increase their ability to earn winning trades. Some of the tools and strategies which a forex trader utilizes are leverage, technical analysis, fundamental analysis, technology and the list goes on. When trading forex the trader has an advantage in their industry which other traders don’t. With forex trading the trader has the ability to utilize a great deal of leverage when placing his/her trades. When utilizing leverage or margin there is not only huge upside but there can also be a great deal of downside. Forex traders must understand how margin trading works prior to them leveraging their trades and should completely understand how the leverage that they use will invariably affect their earnings.
What is margin trading? When using the term margin the forex trader should also think about the term leverage. Margin trading and leverage go hand in hand when it comes to conceptualizing the practice. Typically, when a forex trader places a trade, it is necessary for the forex trader to shell out a minimum amount of the position in good faith. When a forex trader puts up a small amount of their trade with capital, the forex trader’s position is considered to be leveraged. The cost in terms of dollars which is required to be placed is deemed as the margin requirement.
Again, when a forex trader is thinking to themselves what is margin trading he/she should be thinking of the minimum amount of money they need to pony up to maximize their position. A different way to think about margin can be described in terms of when a forex trader opens a contract. When a forex trader opens a contract they are putting down a portion of the positions value as margin. The dollar amount which forex traders have to put down to leverage their trade varies from 2 percent to ½ of a percent. Also, the amount of leverage that a forex trader can utilize can also vary from 1:100 to 1:200 (one hundred to one or two hundred to one).
Another very important aspect related to margin within the forex markets is to open a forex trade the margin is deemed a requirement of trading not a cost of trading. If/when a forex trader utilizes margin dollars to place a trade and his/her position moves against them, the losses incurred will be much greater if the forex trader was to not use margin dollars. This concept and aspect of margin trading must be fully recognized by the forex trader before they start leveraging their positions. The dollar amount of margin utilized by the forex trader magnifies not only their potential gains but also their potential loses. If a position goes against a forex trader they must understand on how to handle the trade or they could lose their shirts.
The amount of margin which a forex trader can utilize is always a topic of conversation. Invariably, the amount of margin which a forex trader can utilize is directly correlated to the country in which the forex trader lives in. Typically, the forex broker which the forex trader is utilizing to conduct their transactions has the margin that can be utilized posted within the line of the trade on the forex broker’s platform.
Unlike the equity and bond markets the forex market allows the forex trader to utilize a tremendous amount of leverage. Once again this can have its pluses and minuses which all depend on the direction in which the trade that the forex trader has placed is headed.
In closing, when a forex trader thinks what is margin trading the first thing that should come to mind is the maximum amount of dollars they can leverage against their trading position. When taking advantage of margin the forex trader has the opportunity to exponentially grow the value of the trade they have placed.