Margin trading on Forex and CFD
All participants in the Forex community are familiar with the term «leverages». Everyone heard about it, but, unfortunately, only a few understand what leverage and margin means, and how these parameters affect trade. Let’s talk about it today.
Margin Trading: what is it?
We will try to answer this question simply and clearly even for beginners. Margin trading (i.e., using credit leverages) is exactly that tool, thanks to which each Forex trading participant gets the opportunity to conclude transactions in volumes that will many times exceed his/her own capital.
That is, a trader, using the opportunities of margin trading, uses a small percentage of his/her money when concluding a transaction, but at the same time he/she has the right to count on increased profits. Roughly speaking, margin is the ratio of the trader’s funds to the total amount, which is expressed as a percentage.
Pros and cons of margin trading, risks
Taking into account the foregoing, it is logical to highlight the advantages that trading using margin provides to a trader:
- trading in large lots is allowed, which increases the likelihood of an increase in own income (while personal capital can be quite small);
- regardless of the currency in which the trader opened his/her account (to open a Forex demo account), he/she gets the opportunity to trade on any instruments;
- a number of particularly expensive assets can be distinguished in the market. Margin trading enables you to work with them, not limited to the amount of own capital.
But here there were some pitfalls. Margin trading opportunities relax the trader (especially the beginner). Being enthusiastic by trading using credit funds, a person can make a number of fatal mistakes, which will result in a complete drain of the deposit. Well, then, like around a circle: replenishment-drain-another replenishment. And if you do not break out of this vicious circle of constant lending in time, then it is not far from complete bankruptcy. What recommendation can we give here? Perhaps, only one: you should constantly keep in mind the increased risks and learn to use stop loss in trading as quickly as possible – a special tool to limit losses.
How is the margin calculated?
In fact, there is nothing complicated in calculating the margin. To do this, you need to divide the volume of a specific transaction by the size of an account leverage, and then multiply by the current currency quote. The obtained result is exactly the amount that will go into the broker’s pocket in case of an unsuccessful transaction (rating of Forex brokers).
We won’t even give specific examples of calculation here, since every serious broker has currently taken care of this in advance. As a rule, a special calculator is already placed in the trader’s account; and it remains only to substitute parameters of a particular transaction in it.
Trading without and account leverage: Is it real?
Definitely, using an account leverage in trading is not a prerequisite. But you will receive profit only in those cases when:
- there are large capitals for opening a deposit at your disposal. And, take a word for it, the amount should be much more than several thousand American rubles. You will get the opportunity to enjoy an adequate profit only in this case;
- you have learnt to catch sharp movements and you are well knowledgeable in a fundamental analysis. In this case, requirements for the initial deposit amount are somewhat reduced, since in a favorable scenario you can catch 100-200 points of profit per one transaction on the news.
That is, trading without an account leverage is available from a technical point of view, but you should have serious means and have professional trading skills for this purpose. At the same time, serious profit indicators in per cent can not be even expected. 0.5-0.7% of the deposit per month – these are real data on trading with an account leverage of 1:1. And such results are more suitable for large participants in the foreign exchange market with millionth turnover, but not for a simple trader.
Account leverages: what are they like?
Well, now let’s briefly go over the options for account leverages that can be provided to an ordinary trader.
- 1:1. We wrote above about trading without account leverages, so we will not repeat it. We will only say that not every broker provides such an opportunity. You will need as much as USD 100 thousand in order to open a single transaction with a volume of 1 lot without using an account leverage. Moreover, if this transaction brings a total loss, then you can no longer open on any instrument.
- 1:20. This amount of an account leverage implies that the amount of deposit when opening a transaction is reduced by 20 times. In other words, if we take the same example with USD 100 thousand, then in this case the broker will freeze only 5 thousand instead of the entire deposit.
- 1:500, 1:1,000 – these account leverages are created for people with minimum deposits. The price per 1 lot in this case will amount to only USD 200 (if you take an account leverage of 1:500) and USD 100 (with an account leverage of 1:1,000).
Selection of account leverages: range of brokers
What account leverage options can a trader expect? As a rule, modern brokers adapt to people who do not have significant amounts of money. This is expressed in two parameters:
- reduced minimum deposit requirements (well, if you don’t have USD 100 to open an account, then why are you even interested in Forex?);
- the list of account leverages is expanding.
For example, AMarkets broker margin trading opportunities are simply amazing. Traders are invited to trade with leverage both 1:1 (yes, this is the same leverage-free trade designed for serious players with large capitals), and at 1:1,000 (this offer is designed for beginners in the exchange currency markets with fairly small amounts). Such a variety of offers enables each trader to choose that very leverage to provide for the most comfortable trading.
What can we conclude? Account leverage is certainly a real salvation for those persons who want or have already started trading in the foreign exchange market, but at the same time do not have the required margin of their own funds.
Almost every trader uses the opportunity of margin trading, regardless of his/her experience and level of professionalism. The only thing that changes is the leverage size: the larger your own deposit, the less leverage will be provided. And working with leverage and their choice is certainly one of the main points in training in market trading. And we recall you once again that leverage must be used deliberately. Only in this case they will serve for your benefit.