Margin Makes Foreign Exchange Trading Exciting
One of the key factors leading to the popularity of foreign exchange trading is "margin". Without this factor, most forex trading would be well outside the realms of average investors. But what precisely is margin?
Margin is a factor which allows foreign exchange traders to control large sums of currency while making relatively small deposits. This works by establishing a "margin Account". This has to be conducted through a forex broker and it will enable the new trader to control what they call currency lots. A currency lot is generally worth in the region of $100 000.
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.
Trading on a margin means that the broker is able to have access to very large profits. But as in all methods of investment there is risk too, so by the same token losses can be made. But reward does after all favor the brave. There are safeguards available that can limit the risk of losses and a broker will terminate a transaction which goes above the deposit margin. However it is still possible to lose more than the original deposit amount even if a small change in foreign exchange is experienced. By the same token, so can large profits be made.
An example of how cash is traded is that it is positioned at 2 decimal places. Forex on the other hand is traded at 4 decimal places. So normal currency may be for example $1.25, and forex would stand at $1.2567. The smallest unit in foreign currency exchange is the "pip" and this on a lot of 100 000 only equals $10. This amount bears no significance to a forex trader, while it may make the average American tourist decide not to take a holiday in Aruba this year. Profits and losses are decided by far larger drops and increases in the value of forex than $10 on $100 000 and this is what makes trading in margins so exciting. - 23204
Margin is a factor which allows foreign exchange traders to control large sums of currency while making relatively small deposits. This works by establishing a "margin Account". This has to be conducted through a forex broker and it will enable the new trader to control what they call currency lots. A currency lot is generally worth in the region of $100 000.
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.
Trading on a margin means that the broker is able to have access to very large profits. But as in all methods of investment there is risk too, so by the same token losses can be made. But reward does after all favor the brave. There are safeguards available that can limit the risk of losses and a broker will terminate a transaction which goes above the deposit margin. However it is still possible to lose more than the original deposit amount even if a small change in foreign exchange is experienced. By the same token, so can large profits be made.
An example of how cash is traded is that it is positioned at 2 decimal places. Forex on the other hand is traded at 4 decimal places. So normal currency may be for example $1.25, and forex would stand at $1.2567. The smallest unit in foreign currency exchange is the "pip" and this on a lot of 100 000 only equals $10. This amount bears no significance to a forex trader, while it may make the average American tourist decide not to take a holiday in Aruba this year. Profits and losses are decided by far larger drops and increases in the value of forex than $10 on $100 000 and this is what makes trading in margins so exciting. - 23204
About the Author:
Foreign Exchange Trading can be difficult if you don't do your research. For more information regarding Online Forex Trading click on the links included in this text.
posted by X - Men @ 3:21 AM
0 Comments
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home