What is Forex Margin Trading?

We know that currencies are traded in lots in forex market, which means 100,000 units of currency in the standard account. However, if traders don’t have that much of money but are willing to participate in forex trading, what should they do? Well, Forex margin trading could be an ideal solution for them. As an important aspect of Beginner Forex, Forex margin trading enables traders to operate with sums higher than their real budget in forex trading and helps to gasoline the trading volume in forex market. In this article, I would discuss what Forex margin trading is and how to start with Forex margin trading for beginner Forex traders.

Beginner Forex Question No.1: What is Forex margin trading?

To begin with, we need to figure out what Forex margin trading means first. By definition, margin trading means traders pay and deposit a certain amount of money to open a margin account with forex broker, then use the agreed leverage to magnify their profits and control a larger amount of position than he owns. For example, a leverage of 200:1 means that a trader is able to operate with a sum that is two hundred times bigger than the sum in his account. In other word, the size of the margin must be not less than 0.5% from the sum that traders operate on the Forex market.

Beginner Forex Question No.2: What are the main purposes of margin trading?

The reason that a trader makes Forex margin trading is essentially related to increase the possible return on currency investment by using borrowing money. Forex margin trading enables traders to use leverage to control a larger position than the amount that they can control with their own capital, in order to amplify the profit.

Beginner Forex Question No.3: How to start Forex margin trading?

For beginner Forex traders, they need to find a regular Forex broker in order to start Forex margin trading. Once traders select their proper Forex brokers, then they can set up a margin account. Using a margin account is similar like taking a short-term loan from the Forex broker, which is equal to the amount of leverage traders would take.

Before making any trade, traders need to deposit money into the margin account first. The amount is based on the agreement between the investor and the broker. For example, usually these accounts which would be traded in 100,000 currency units have 1% margin rate. That means traders who want to trade $100,000 only need to deposit $1,000 into the margin account, while the remaining 99% is provided by the broker with interests depending on the traders’ positions and short-term interest rate of certain currencies.

Beginner Forex Question No.4: How to minimize the risk of Forex margin trading?

Although Forex margin trading is quite profitable, it can be highly risky since it amplifies the risk for traders to bear at the same time. Since the losses will mount rapidly in an unstable Forex market, therefore it is suggested that traders should place stops with their orders in Forex margin trading, especially for Beginner Forex traders. In a margin account, the broker would set a certain level like $1,000 for the deposit as security. If traders’ positions keep going worse and there is no sufficient fund in the account to keep all open positions viable, the broker might execute a margin call, which means traders are required either to deposit more money or close out the position to limit the risk. Since using leverage could magnify losses by many times, forex margin call closes open positions in order to prevent further losses for both parties.

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