Introduction To Forex Margin Trading And Its Principle
Forex Margin Trading facilitates the traders to open trades using the broker’s money on the security of predetermined quantity. Forex traders can trade using this revenue and able to make big trades.
The Main Principles of Margin Trading
Traders are not facing the goal of acquiring real money while selling and buying assets, they earn only on exchange differences. This is the real principle of forex margin trading.
The process in which there are simultaneous buying and selling of assets in a method that forex trader earns profits from the price differences between the two assets is known as arbitrage. Actually, the client adds funds to the brokerage company, known as margin. If a traded product is popular, the margin requirements are low. In case, if a product has low liquidity then margin can increase significantly.
The major difference between the usual and Marginal loans is the fact that the amount provided by the forex broker many times exceeds the margin. The forex broker is eligible to use the provided funds purely for making transactions in the forex market.
Leverage is an important factor to be considered in margin trading. It is provided by the forex brokers to their clients in order to increase their invested capital tens of thousands of times. For the purpose of margin size calculation, the trader must divide the total volume of the opened position by leverage.
The free margin in forex trading is a deposit balance that is not used and calculated by the difference between equity and used margin. So, the pledge for this deposit balance does not apply. Free margin is also known as a usable margin, you can use it. Forex Trader is able to calculate the number of orders that he can open by a free margin.
The safety of traders’ funds is based on the amount of leverage used for their trades. Consider an example for better understanding, if you have a small deposited amount in your live trading account then definitely you will choose the highest leverage value, it will be caused to reset your trading account within a short time period. It is mandatory to place a stop loss safety order to avoid these types of circumstances.
Margin Trading Regulators
The term “variation margin” is called the loss of trader and his profits from trading. The size of this indicator is set by the forex broker. In an event that trader is below a certain level, the trader becomes bankrupt.
To reduce the loss of own funds, the brokerage company sets its loss levels. If the client exceeds this threshold, the forex broker offers him to raise the size of the collateral. This type of appeal is called the Margin Call or margin requirement.
When the forex trader receives the margin call it is mandatory to make some deposits into his account. If the deposit remains the same and losses increase, the forex broker will compulsorily close all open positions of the client. This specific action is called stop out.
After that, the financial effect of trade is formed. Its size is equal to the difference between sale prices and purchase prices. Additionally, the margin is released and the result of the operation is added to it. In the case of a positive result, the trader returns the money. A negative result caused the deduction of loss from the security deposit, only the balance is returned. In a few cases, the trader gets nothing.
Beginner traders should remember that the use of the biggest amount of leverage involves significant risks and inevitably leads to loss of funds on the deposit.
Positive and Negative Sides of Margin Trading
Investors with large capital and unprofessional traders whose deposit does not exceed a few dollars can trade. Margin trading delivers an excellent opportunity to open orders with a deposit of no more than 3% of the transaction amount.
The use of leverage increases the possibility of a good profit if the price trend moves in the right direction. Conversely, under unfavorable circumstances, losses also increase with great speed.
The prime choice of leverage when trading the currency pairs with high volatility gives an attractive amount of profit. But wrongly chosen leverage when trading volatile assets only increase losses.