Margin Makes Foreign Exchange Trading Exciting
One of the chief benefits of foreign exchange trading is having "margin" on your side. This is what makes it so exciting as well as profitable. The ordinary investor would not have access to trading in forex if it we not for margin, but what exactly is this?
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.
Forex is actually traded in smaller units than cash is. For example the US dollar trades down to four decimal points. For instance instead of $1.42, it will ready as $1.4238. The smallest unit is known as a "pip". When trading US dollars in a value of a $100 000 lot, your pip is valued at $10. If the price of the dollar were to change from $1.4238 to 1.5238, it is a 100 pip difference and while this loss or profit of $10 may be meaningful to a tourist, it means very little to an investor. This example indicates how margin is able to increase potential profit or loss. - 23159
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.
Forex is actually traded in smaller units than cash is. For example the US dollar trades down to four decimal points. For instance instead of $1.42, it will ready as $1.4238. The smallest unit is known as a "pip". When trading US dollars in a value of a $100 000 lot, your pip is valued at $10. If the price of the dollar were to change from $1.4238 to 1.5238, it is a 100 pip difference and while this loss or profit of $10 may be meaningful to a tourist, it means very little to an investor. This example indicates how margin is able to increase potential profit or loss. - 23159
About the Author:
Want to find out more about foreign exchange trading, then visit John Eather's site on how to choose the best forex trading robot for your needs.
posted by X - Men @ 1:51 AM
0 Comments
0 Comments:
Post a Comment
Subscribe to Post Comments [Atom]
<< Home