All traders use borrowed funds in one way or another to increase the potential return on investment. Investors often use margin accounts when they want to invest in stocks or currencies, using money "borrowed" from a broker to control a large position starting with minimal capital.
So they can risk a relatively small deposit but buy a lot, which otherwise would not be affordable for them. The margin on Forex is an important topic for novice traders. Therefore, we propose to delve into Forex and find out everything in detail.
If you do not go into details, Forex margin is simply the extent of buying power that a broker provides you against your deposit.
Margin trading allows traders to increase their initial position size. But we must not forget that this is a double-edged sword, as it increases both profits and losses. If the price forecast goes wrong, the Forex account will get empty in the blink of an eye because we are trading a huge volume.
Traders should pay attention to the margin in Forex because this tells them if they have adequate funds to open further positions or not.
Better understanding of margin is really vital for traders while getting into leveraged Forex trading. It is important to comprehend that trading on margin has high potential for both profit and loss. Hence, traders should familiarize themselves with the margin and terms associated with it like margin call, margin level, etc.
Margin level is the percentage of your deposited amount that is already used for trading. It will help you see how much money is used and how much is left for further trading.
Free margin is the available buying power for trading. Free margin is calculated as subtracting the used margin from total margin.Free margin example
Suppose I have $8000 on my balance. In an open trade, $2500 is borrowed. Free margin is $8000 - $2500 = $5500. If you try to open a deal for which there is not enough free money, the order will be automatically canceled.
Leverage and margin are two sides of the same coin. If the margin is the minimum amount required to place a leveraged trade, then leverage is a tool that allows a trader to move large lots that would not be affordable for him at the cost of 1: 1. Leverage is the "increased trading power" available when using a Forex margin account. It is a virtual "placeholder" for the difference between what we have and what we want to operate on.
Leverage is often expressed in an "X: 1" format.
So, I want to trade a standard lot of USD / JPY without margin. I need $100,000 on my account. But if the margin requirement is only 1%, I only need $1000 on the deposit. The leverage, in this case, is 100: 1.
Of course, margin trading is a useful tool for those looking to trade Forex with limited start-up capital. When used correctly, leveraged trading promotes rapid profit growth and provides more room for portfolio diversification.
This trading method can also exacerbate losses and involve additional risks. Thus, we conclude that it is quite hard to enter the real market without knowing the features of Forex.