What is Margin Trading
The ‘magic beans’ of Forex trading?
If you dont have much capital, you may be thinking that it would be impossible to make decent money on forex markets. Fortunately that old adage you’ve got to have money to make money doesnt hold true in online forex. This is down to what is called margin trading.
You may have seen online forex brokers advertising things called margins or leverage, which are the same thing, of 1:20, 1:50 or even 1:100. the bigger the margin, the greater the possibility to make money quickly, and the greater the risk. This is how it works:
When trading the margin, you only have to cover a certain amount of the trade or position that you wish to open. So lets have an example of a margin of 1:50 and lets say you had $100 dollars you wished to trade for euros. Ordinarily you would think that you could only get $100 worth of euros, and that if the euro went up by 5%, you would have made a whopping $5. however with online trading brokers that offer margins, you would have actually made $250. yes two hundred and fifty dollars, from a $100 investment.
There is no magic here, what happens is that when you open a trade with your $100 dollars, the broker actually puts in an order for 50 times that, so you are really opening a $5000 position. Once the market moved 5%, your position was worth $5250, and when you cash it in the broker takes their commission, (something like $10 or $20) and you keep the rest of the profit.
But what if you got it wrong, and the position actually moved 5% the other way. Well you would think that you would lose $250 as well, but this isnt the case. Online forex brokers operate what is called stop loss orders, which means that you cannot lose more than what you originally put in. The forex companies computer system automatically closed the trade if you have lost the amount you originally put up to stop any further lossess, and you a relatively safe.
Most companies let you program your own stop-loss orders, so that your account will automatically close a trade if you have lost an amount you specify. This means that you can sleep soundly with a position open, knowing what the worse case scenario could be, and allowing you to risk more capital for even greater reward. Before investing any real money, you should definately try out at least one online demo forex account.
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