subject: Important Tips About Forex Leverage And Margin [print this page] Applying the concepts of leverage and margin in forex trading forms an important cornerstone that defines your success as a forex trader in the long term. Having sufficient information about these two terms is thus essential. Most forex traders usually do not pay much attention to leverage, some even opt for high leveraged accounts as well, which could prove to be disastrous if you do not know what you are doing.
In this article, we'll explain the terminologies behind forex leverage and margin that will be beneficial for forex traders.
What is margin in forex?
Margin in forex is basically the remaining part of your trading amount in your live forex account. Margin is important in forex, especially if you are trading on leverage as it helps to cover any short term losses during the trade. The margin is not to be misunderstood as a cost of transaction but rather the fraction of your capital that is set apart from the trading capital.
In order to calculate the amount of margin required, this is usually done by calculating the percentage of the size of the notional trade along with a small amount that acts as an additional capital to cover the losses.
Why should you trade on margin?
Forex margin trading or leverage trading enables traders to maximize their invested capital to the leveraged amount. For example, if you were trading on a 1:10 leverage and your invested trade amount is $100, then using leverage, you are able to trade with $1000. In such as scenario, margin becomes important as it adds a layer of safety to cover up any losses that might come your way. In other words, leverage or margin trading can help traders to amplify their trading accounts and make better profits from the markets.
Most forex brokers offer a wide choice of leverage, starting from 1:1 to as high as 1:500. However, beginners to forex should stick to the 1:1 leverage to avoid making any costly mistakes. In fact most professional traders usually stick to the 1:20 up to 1:50 leverage, which is considered to be a safe zone.
The other benefit of sticking to lower leverage is that it helps you minimize your losses as well, which is especially true when it comes to new traders to forex. In terms of margin, the usual default margin that is required is 0.5%. However this figure can be adjusted as you start trading and begin to the gain the confidence in the markets.
