Margin Trading On FOREX Market

To encourage investors who have less than 1 million dollars to trade on Forex the mechanism of margin trading is used. This mechanism was introduced to world currency trading in 1986. Margin trading lies in buying/selling currencies, using leverage and deposit insurance, which allows traders to make trading contracts on huge sums without providing the real money for it. BUT every trader should remember that increasing leverage increases risk.

Investors with small and moderate deposit sums run Forex trading through the dealing companies. Usually the minimum one should have to start trading on currency market equals to 2,000 US dollars. Dealing company offers its clients a credit line (or “dealing leverage”) which profoundly exceeds the deposited sum. For example, a credit leverage of 1:100 allows to use the initial deposit of 10,000 dollars for trading 1,000,000 dollars. So, private capitals of investors make up only 1-3 % of the sums traded by them on the market. Even small profits on Forex turn into great revenues when compared to what is deposited by investors to get these profits. BUT once again, please remember that increasing leverage increases risk.

Let’s have a look at this example to clarify all details. You have 2,000 US dollars on your account. With the credit leverage of 100:1 you can open trading position of 200,000 dollars. At 11:00 A.M. US dollar rate to Swiss franc reached 1.4045 – 1.4050. You think that dollar has to grow, and give trading order to buy 100,000 dollars at this price. At 3:00 P.M. dollar rate becomes 1.4250 – 1.4255. You decide to close the position and sell your 100,000 dollars at a new price. After calculating pure income you find out that it is 2,000 Swiss francs (or about 1,400 US dollars).

This goes as 140% revenue from the deposited amount. When closing the position, this money goes to your trading account automatically. BUT we want to notify you one more time that increasing leverage increases risk – in this case you can get 100% drawdown – the lost of all trading capital.