Forex margin trading is a way of applying leverage to increase the purchasing power of your money. Leverage simply means using a small sum to control a much larger sum. This is made possible by the fact that the likelihood of a currency‘s value changing by more than a specific percentage in the short term is low. So you can place a few hundred dollars in your brokerage account to trade on the margin – the amount that you think the price will fall. The balance is, in effect, lent to you by the broker. It is a technique that the makers of trading robots, like the Forex Megadroid Robot, have attempted to build into their systems.
Margin trading is not unique to forex, people us this leveraging technique in stock and futures trading too, although it works best on currency markets. Depending on your broker’s terms, you may be able to control 50, 100 or even 200 times your account balance.
The possible profits of margin trading is large, but so is the potential losses if it goes wrong. In general, the more leverage you use, the more risky your trading is.
We can understand leverage and margins if we consider an example.
Lets use the British pound sterling and US dollar for this example where the exchange rate is shown as GBP/USD 1.5100. So to buy one British pound you would need $1.51. Imagine you were expecting the dollar value to rise against the pound, so you decide to sell enough pounds to buy $100,000. If your broker used lots of $10,000 each, this would be 10 lots. Now you would have to wait and see if the dollar value went up as expected.
After a few days you see the price is now GBP/USD 1.4600. Sure enough, the dollar has risen and the pound is now worth only $1.46. If you decide to sell your dollars now and buy pounds, you will have made a profit of 3.3% less the spread. 3.3% of $100,000 is $3,300, so that would be an excellent trade.
But most of us do not have $100,000 spare cash buy Haldol online that we want to trade on the currency exchange market. So here is where the principle of forex margins comes into play.
Since you are buying and selling different currencies at the same time, your own money only has to cover any loss that you might make if the dollar falls instead of rising. And you would put a stop loss into place to limit that loss, so $1,000 might be all you needed to have in your account to make this $100,000 purchase. The remaing $99,000 is guaranteed by the broker.
Recently brokers have started to offer limited risk accounts, where your trades are automatically shut down if your account balance hits zero. This prevents you from getting into a situation where, after several losing trades, you cialis for sale online end up losing more than you had in the account. Your account is managed by the broker‘s software, that will not allow your account to get into a negative balance. If you trade with a robot like Forex Megadroid, it is possible to adjust the settings to manage this for you too.
Using leverage in this way is so common in currency trading that you will soon do it without even thinking about it. However, you should always be mindful of the risks. It is always safer to trade with lower amounts, rather than risking large amounts on a margin. Some people do prefer to use automated systems to manage this type of trading for them, you can generic cialis pharmacy download Forex Megadroid yourself and test it on a demo account first.
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Posted under Currency Trading
This post was written by admin on August 31, 2010
