Key To The Popularity Of Foreign Exchange Trading Is "Margin"
Margin is one of the key features that makes foreign exchange trading so exciting a prospect. Without a factor like margin, trading in this area would be completely out of reach for the ordinary man in the street who wants to invest in this area. However, what exactly does "Margin" mean?
Foreign exchange traders are able to control large lots of currency by means of margin. They are able to do this while investing relatively small amounts of money. The trader will open an account with a forex broker in order to gain access to leverage. In this way they can control lots of up to $100 000 in foreign currency, this is the generally accepted size of these lots.
The leverage the trader gains from the margin account is expressed as a ratio. For instance a leverage ratio of 100:1 means the trader is able to have access to control over 100 x their deposit amount of forex assets. So essentially in a $100 000 standard forex lot with a 1% margin will require a deposit of $1000.
It has to be borne in mind however that trading on margin can increase losses as well as profits. The potential is there, and is very real for any trader, to lose as much as if not more than their original deposit. It is possible to put safeguards in place to prevent this from happening. In order to limit any losses a broker generally terminates a transaction which goes beyond the deposit in the margin. However losses do occur when even a small change in a currency occurs, as do profits.
Cash is traded in far larger units than foreign exchange. A good example of this is the USD, this currency trades down to 4 decimal places. In other words, what might be $1.35 in normal currency; in forex would be $1.3576. The smallest currency exchange unit is the pip. In a $100 000 lot the pip equals $10. and while $10 might have some meaning to a tourist from the US going on holiday, it has little meaning to an investor. So if the currency of exchange increases say to $1.457, it would either mean a loss or profit of $10. - 23200
Foreign exchange traders are able to control large lots of currency by means of margin. They are able to do this while investing relatively small amounts of money. The trader will open an account with a forex broker in order to gain access to leverage. In this way they can control lots of up to $100 000 in foreign currency, this is the generally accepted size of these lots.
The leverage the trader gains from the margin account is expressed as a ratio. For instance a leverage ratio of 100:1 means the trader is able to have access to control over 100 x their deposit amount of forex assets. So essentially in a $100 000 standard forex lot with a 1% margin will require a deposit of $1000.
It has to be borne in mind however that trading on margin can increase losses as well as profits. The potential is there, and is very real for any trader, to lose as much as if not more than their original deposit. It is possible to put safeguards in place to prevent this from happening. In order to limit any losses a broker generally terminates a transaction which goes beyond the deposit in the margin. However losses do occur when even a small change in a currency occurs, as do profits.
Cash is traded in far larger units than foreign exchange. A good example of this is the USD, this currency trades down to 4 decimal places. In other words, what might be $1.35 in normal currency; in forex would be $1.3576. The smallest currency exchange unit is the pip. In a $100 000 lot the pip equals $10. and while $10 might have some meaning to a tourist from the US going on holiday, it has little meaning to an investor. So if the currency of exchange increases say to $1.457, it would either mean a loss or profit of $10. - 23200
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posted by X - Men @ 5:42 AM
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