Leverage and Margin in Forex Trading
In Forex, margin and leverage play a vital role. As per the dictionary, leverage means the power to control a huge amount of currency using little own money . The actual amount of money with which an investor can trade is known as margin.
With leverage, a trader can control much larger stake of money in spite of having a relatively modest level of margin. Since margin allows the trader to trade without owning all the money, it can be very advantageous to trade. Thus, an investor can trade in multiples of the margin amount, the actual dollars he/she owns.
The concept of leverage offers both small and large investors the ability to trade large amounts of money. An investor can trade $100,000 in currencies with a deposit of $1000. One can be able to control as much as up to 200 times the actual account balance. However, the amount of leverage available depends on the policies of brokers. The margin also varies from a broker to broker.
Basically, Forex margin and leverage implies borrowing money from a broker to invest more. It is not a money loan system. It can be used for leveraging your trades. The more leverage you decide to use the riskier your trading. So, it is wise to use a percentage of the money you get instead of using the full amount.
The maximum leverage offered by most brokers would be 100:1. For every dollar of margin amount, investors can trade 100 dollars. Leverage is a double-edged weapon as even though, trading at a high level of leverage has the potential of great profits, the risk of very high losses also more. Proper money management helps to lower the risks.
While trading, investors may come across some other Forex margin terms such as margin required, account margin, etc.
“Margin required” is the margin required by the broker to open a position. “Account margin” represents all the money in the Forex account of the trader. “Used money” is the money that the trader still owns.
Leverage rates are as high as 500:1 in Forex than any other trading instrument. However, if you don’t know what you are doing, you will get a margin call. Ensure to select the correct amount of leverage that gives you a profit without risking a margin call. Margin call happens when the amount of margin in the trader’s account is not enough to sustain a further loss.