FX Margin Trading: Make More Profits With Less Borrowing Your Broker's Money

Foreign exchange margin trading is a method of using leverage to increase the purchasing power of your money. Leverage actually means using a small sum to control a much larger amount. This is attainable because it is improbable that the quote of a currency will fluctuate by more than a few percentage points over a short time. So you can put a few hundred dollars in your brokerage account to trade on the margin - the amount that you think the price could change. Your broker will in effect permit to borrow you the difference.

Trading on margins is also known in equities and commodities trading, but because of the special nature of currencies, you can apply a lot more leverage in the currency markets. Depending on your broker's terms, you may be able to trade with 50, 100 or even 200 times your trading equity.

This may produce big profits if you are winning, but it can also mean big losses if not. As a rule, the more leverage you use, the riskier your trading is.

We can understand leverage and margins through an example.

Assume that the current rate on the British pound to US dollar foreign exchange market is shown as GBP/USD 1.7100. So to buy one British pound you would need $1.71. If you expected the price of the dollar to rise against the pound you may decide to sell enough pounds to buy $100,000. If your broker used lots of $10,000 each, this would be 10 lots. Then you would sit back and wait for the price to go up.

Several days later you might find that the rate had moved to GBP/USD 1.6600. Sure enough, the dollar has risen and the pound is now worth only $1.66. If you sell your dollars now and buy back into pounds, you will have garnered a profit of 2.9% less the spread. 2.9% of $100,000 is $2,900, so that would be a fantastic trade.

But most of us do not have $100,000 spare cash that we want to trade on the foreign exchange markets. So here is where the principle of margin trading comes into play.

Since you are buying and selling various currencies at the same time, your own funds simply has to cover any loss that you might possibly make if the dollar falls instead of rising. And you would put a stop loss to limit that loss, so $1,000 might be all you needed to have in your account to make this $100,000 deal. Your broker guarantees the other $99,000.

In fact most brokers now operate limited risk amounts where the account will automatically close out the position if whatever funds you have in your account are lost. This prevents margin calls which can be ruinous for a trader because they mean that you may lose more than you have. But with a forex limited risk account that is impossible. The broker's software that you use to control your account will not let you lose more than your account balance.

Using leverage in this way is so popular in currency trading that you will soon do it without even thinking about it. Still it is important to bear in mind the risks. Lower leverage is always safer and you may never want to go to the highest edge forex margin that your broker would allow. You may also reduce your risk by using highly reliable forex signals. There are a lot of forex signal providers available online. But keep in mind the fact, that not all forex signals are winners, so don't risk too much on any single trade.

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