What is Leverage and Margin in Forex Trading?
Index 1.
What is Leverage and Margin in Forex Trading?
2.
Leverage Trading
3.
Margin Trading
4.
Profits & Losses With Leveraged Trading
What is Leverage and Margin in Forex Trading? ď‚— Forex leverage and margin very important in forex trading. If
the broker gives high leverage, then you understand margin rules of Forex Broker.  Let’s discuss leverage and margin and the difference between
the two.
Leverage Trading ď‚— Forex Leverages and Margins trading is the facility to be able
to trade for significantly higher amounts than what you have in the account. ď‚— We can define leverage as the extent of open positions that
you are allowed to create in the market against a given amount of the margin deposit.
If the broker is allowing you ‘leverage’ of 50:1, then it means
you only have to put up the initial margin of 2% of the value of the position you want to trade. Assuming your account currency is USD and value of the
position was $50,000 then the broker would earmark 2% of $50,000, i.e. $1,000 from your account towards the margin deposit.
In effect, the broker funded your position for $49,000 the
amount of capital you may be said to have ‘borrowed’ for position.
Margin Trading ď‚— Because of the leverages offered, Margin trading is a facility
provided by a Forex broker to his clients so they may trade without having to put up the whole capital required for their position. ď‚— The client is, therefore, trading with borrowed capital.
ď‚— However, the broker will always demand a specific, small
deposit of money, called the margin deposit to be paid by client before the position can be taken. ď‚— This deposit, which may be as low as 1-2% of the value of the
total position, is the only initial investment required of the client.
ď‚— The broker earmarks the amount and sets it inside the
position taken by client. ď‚— When the position is squared up by client at a profit/loss, the
margin is released back, along with credit for the profit/loss on the transaction.
Profits & Losses With Leveraged Trading ď‚— Leverage is a double edged sword while your profits would
be increased and multiplied with the same amount, say 50 times in the above example, same would be right for losses if your trade goes to the south. ď‚— Hope you understand what is the use of leverage and margin
in trading forex.
Thank You