Forex for beginners

What is margin trading in the Forex market

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The desire to make money and to live better is inherent in every normal person. To make transactions of purchase / sale in the financial markets, previously required hundreds of thousands of dollars. But how to be a trader, not a position similar amounts of money?

In this case, the revenue to the investor to come brokers offering margin trading, i.e. trading using monetary funds of the broker secured a predetermined amount (margin). Thus, the trader can conduct trade in the financial markets and in particular Forex.

The main principles of margin trading

It Deposit allows the investor to receive credit for conducting business transactions. Buying and selling assets, traders do not think of purchasing real currency. They earn only on exchange. This is the basic principle of margin trading.

Directly operation to trader’s receipt of income from exchange rate differences are called currency arbitrage. In fact, the client deposits funds into the account of the brokerage company. They are the margin. If the traded asset is popular, the margin requirements low. When asset liquidity is low, the margin can increase considerably. In the foreign exchange market, it is usually not more than 2%, the stock can reach 50%.

The main difference of the margin loan from the usual is the fact, when the broker the amount many times greater than the Deposit. Trader Funds may only be used for transactions in the Forex market. After the transaction in one direction the investor carries out operations in another. For example, if he made a purchase of a pair EURUSD at the volume of 0.1 lot, then after a while he will do the transaction on sale of the same asset in the same size.

Margin trading increases the volume of transactions on the trading floor. One lot is the standard unit of measure of the size of a single transaction in Forex is 100 000 base currency units. Many investors use to trade mini-lots (0.1 standard lots) or even smaller units, micro lots (0,01 of a standard lot). For traders who do not have large sums of money, such volumes very convenient, especially because you can get a pretty decent profit selling them.

An important element of margin trading is the leverage that the broker provides to his client. Thanks to this lever, the investor has the opportunity to tens of thousands of times to increase your trading capital. To calculate the amount of margin that a trader must divide the volume of opened positions on leverage.

In trading there is the concept of free margin. It is the balance of the Deposit not used in trading. Consequently, the Deposit the balance is not applicable. Free margin allows you to calculate the number of orders that a trader may still open. The choice of leverage is a very responsible thing. This depends directly on the security Deposit of the investor. For example, if you Deposit small amount of funds and the choice of leverage is large in size, you can quickly reset your account. To avoid this, when opening a trading position to set a safety Stop Loss order to minimize possible losses.

Regulators of margin trading

The term “variation margin” are called the investor’s profit and loss from trading. The size of this index is set by the broker. In the case when it is below a certain level, a trader becomes a bankrupt.

To prevent loss of its own funds, any brokerage company sets its own levels of loss. In case of exceeding the threshold, the broker offers him to increase the size of the Deposit. Such an appeal to the investor is called a Margin Call (margin requirement). If after contacting the Deposit remains the same, and the losses grow, the broker forcibly closes all open positions of the client. This action is called Stop Out.

Then, the generated financial result. Its size is equal to the difference between the purchase price and sales. In addition, the released collateral margin, and it is summed up the result of the operation. In the case of a positive result, the investor return of means. A negative result provides a basis for the deduction of the loss from the Deposit, returns only the remainder. In the worst case, the trader gets nothing.

Novice traders should remember that using big leverage is associated with significant risks, and will inevitably lead to loss of funds on Deposit.

Positive and negative sides of margin trading

Popularity of such trade due to its accessibility. Can trade as investors with large capital, and traders are lovers whose Deposit does not exceed a few dollars. Margin trading provides a great opportunity to open orders with a Deposit of not more than 3% of the transaction amount. A huge number of participants makes it the most liquid assets, and the Forex market is stable. The broker receives income in the form of interest payments on the loan, as well as of the spread.

The use of leverage increases the possibility of obtaining good profit in the case of the price movement in the right direction. However, under adverse circumstances, the losses also increase at high speed.

The optimal choice of leverage when trading currency pairs with high volatility gives a decent profit. But incorrectly selected the lever when you trade volatile assets only increases the losses.

Some recognised authorities an unflattering comments about margin trading. Warren Buffett, in particular, called it a weapon of mass destruction, bearing in mind the risks when trading. However, experienced traders say that with the right approach to this type of trading and the daily improvement of their knowledge, the success would definitely follow novice investors.

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