Forex margin trading enables investors to trade in the forex market with smaller capital investments. Forex margin accounts let traders use their leverage to acquire bigger purchasing power. This boosts profits in multiples but uncalculated risk may lead to financial disaster.
The term ‘margin’ was picked from Japanese. It means ‘proof’ in English. The idea is to deposit an amount which is usually 1% of the real value as proof to begin trading. Leverage is then expressed in margin terms. For example, if a trader opens an account with $1000 and leverage is 100:1, the person can trade with up to $100,000.
For a beginner, these two terms may be confusing. Maintenance margin is the amount a trader needs to replenish his forex account with so as to continue trading after incurring losses. In such cases, the account balance dips below the minimum amount that is required to carry on. Thus, the need for depositing the maintenance margin arises. Forex margin, however, is the least amount to kick start trading.
Forex margin accounts are useful as they help new investors become better informed about the forex market and its tools.
Least investment: With investments as low as 1% of the real value, the forex margin accounts let beginners and traders with less cash trade in the market and with equal competitive edge.
High leverage: As the forex market deals in lots of minimum 10,000 units of a currency, leverage of just 100:1 for $1000 equips a trader with enough reserve to trade and multiply profits. For example in the above case, if the value of USD goes from 1.3256 to 1.3356, the profits becomes (100 pips * 100,000 units) $1000, whereas without leverage, it would have been only $10.
Leverage not only multiplies profits but also multiplies losses. This is a double edged sword. So, using leverage without caution or effective money management may require deposits of maintenance margin to continue trading.
Forex margin accounts are an effective way for traders to start trading with low investments. However, factors such as greed and gambling can negate the positives of this facility. Traders, who are new and experienced, are advised to exercise caution while availing such service.
