The concept of foreign exchange margin trading is simple to learn and understand. When you trade on margin, you may be able to place a trade that is larger than your account. This enables you to make big profits even with a small account. However, you need to be careful when using this concept as it can also result in big losses.
When you use margin trading you are in fact borrowing money from the broker. For example if a broker is offering you a margin of 100:1, you may be able to trade AUD 10,000 with AUD 100 in your account. This can be a big advantage as even small fluctuations in the market can help magnify your profits.
Top rules for foreign exchange margin trading
If you want to use margin trading you first have to pay and deposit a specified amount of money to the brokers. This enables you to use the agreed leverage, so that you are able to increase your profits substantially. With a leverage of 100:1, you may be able to operate with a sum that is a hundred times more than the sum in the foreign exchange trading account.
It is best if you can choose the size of the margin to be at least 0.5% of the sum that you wish to trade in the forex market. When you are able to control a larger amount of money even with a small account, you may be able to increase the return on your investments. You need to find a broker of your choice before you start using margin trading to place a trade.
Margin trading is similar to taking a short-term loan from the broker. Before you start placing a trade using margin, you may have to deposit the money into the trading account. The amount of money that you have to deposit depends on the agreement you have with the broker.
For example if you want to trade with 100,000, you may have to deposit 1,000 in your account. The 1,000 deposit is the 1% margin rate that you may have to deposit while the broker provides the remaining money.
Tips for minimising risks of foreign exchange margin trading
Although foreign exchange margin trading can enable you to earn substantial profits even with a small trading account, you need to understand that it is also risky. You may also lose big amounts of money if you are not careful. If you are a new or inexperienced trader, it is best to avoid using margin trading until you have gained adequate knowledge and experience about this trade.
It is advisable to use stop loss so that you are able to minimise the losses if any. If the trade that you had placed ends in a loss and there is no sufficient amount of money in the account then the broker may execute a margin call. You may be able to place a trade only after you have deposited money in your account.