How to Utilize a Forex Trading Margin Account
Online forex trading on the margin means you can buy a large sum of foreign currency with actually paying only for a fraction of the investment. This means you pay much less for the currency you buy, by leveraging your initial investment. All of the online Forex trading is done one the margin, and the next example will make it clearer.
For example, If you have $1,000 in a margin account that has a leverage ratio of 1:100, it means you can potentially buy foreign currencies worth up to $100,000, because you place the $1,000 just as a deposit for the leveraged currency.
The major advantage of using a margin trading account is that with margin trading you can increase your buying power and have bigger profits. This is one of the biggest advantages of the online Forex trading.
Avoiding Risks in Margin Trading
- -With a Margin Forex trading account, you increase your losses, as well as your profits. So if a currency drops, even by one pip, you are essentially losing 100 times the drop.
- -If you invest in a margin account, a drop in the currency can liquidate your account and also leave you owing money. This is why it is important to check and make sure you are also covered in cases of losses.
- -Stop losses are one of the tools you can use to ensure your account doesn't drop and is not lost.
- -Investing in the margin also needs to take into account how stable the currency is. If the online Forex trading currency is dynamic and has a high rate of fluctuations, a smaller leverage is recommended. To check if the currency is stable you can use technical analysis to examine the different options.
Every time you perform a new trade, part of the account balance in the margin account is put aside as the initial margin requirement of the trade. Before you invest, you should calculate the amount used as the margin requirement. To calculate this, multiply: the current currency price*the units traded*times the margin percent/100. If the requirement is larger do not invest in that currency.
Make sure you invest wisely and read the terms and conditions of the margin Forex trading account thoroughly before the investment.
Paul Gatton, Technical Writer