Risks and Rewards of Forex Margin
Having a forex margin account is the standard way of trading the forex market. Without it, most traders would not be able to make a decent income from currency trading. It has equally both risks and rewards associated with it.
Let’s start from the beginning. On most trading days, there are relatively minor fluctuations in the currency markets. Currencies work on something called pips. Pips are basically .0001 cents. That’s right, just fractions of a penny. If it fluctuates 1000 pips in one day, it’s the big day. If it fluctuates 100 pips, it’s a pretty normal day.
Obviously with those kinds of fluctuations, unless you were trading very large sums of money, you really wouldn’t be able to get much a profit from your currency rising by even just pennies let alone fractions of a penny. That is where the forex trading margin comes in.
Here’s how margin works. You put down a deposit of your own money, say $1,000. With that one grand, you can trade up to $100,000 of your broker’s money. That way, even if there is a fluctuation of fractions of a penny, you can still at least make $50-200 per trade, which isn’t bad. Out of all the forex trading strategies that are out there, virtually all of them require a margin account for them to make any sense. The only ones trading without one are large institutional traders. But even they take loaned money say from their money market customers and trade essentially with other people’s money.
There are great benefits to forex margin trading. In fact, it’s really the only way to make a decent living from trading the market. But even still, as much as there are potential gains to be had there is also an equal level of risk that is incurred.
The way margin as already explained, you are trading someone else’s money, namely your brokers. They aren’t going to put their money at risk. So how do they cover themselves? They do it with something called a margin call. If a position is close to losing more than is in deposit for the margin account, than the broker automatically closes out the position and you the trader basically lose most of your deposit. And this can happen fairly quickly if you don’t have enough in your account to cover any minor negative fluctuations.
So trading on a forex margin account is necessary to make forex trading worth while. But it also has an equivalent risk factor that traders must consider before jumping into this. Because of the potential risks, new traders should make sure they know what they are doing and understand that they can lose their shirt and then some if they don’t know what they are doing.
Tags: forex margin, forex margin trading, forex trading margin, forex trading strategies
June 23rd, 2010 at 4:00 am
Forex margin is the key which has unlocked the opportunity to profit from the forex market. However it is sad to see that instead this has led to a large amount of failure. Indeed using reasonable leverage and appropriate stop loss are crucial to succeed in forex.