Margin trading is not for everyone. It is more suitable for scalping and day trading. Margin trading aims to profit from even the tiniest price fluctuations. Leverage is used to boost these gains even further. In most cases, traders are drawn to the Forex market by the fact that it is open 24 hours a day, 5 days a week, which makes it quite convenient. All of this is possible with a small amount of money.
Retail traders, on the other hand, make the mistake of concluding that Forex trading is the best option for them, despite the hazards involved. A margin account can be opened as soon as a Forex trading account is opened. Even yet, there are still a lot of traders that fail to define leverage and margin trading, two of the most common phrases in Forex trading, in a clear and precise manner.
How to Trade on a Margin
Cash accounts and margin trading are not the same. When you open and hold a position in the foreign exchange market using a margin account, you can use the borrowed funds. In addition, it increases traders’ exposure to the financial asset, as opposed to trading with cash. Every trade you make in the Forex market has a margin requirement attached to it. This is the money that you give to the broker as a deposit or as collateral.
Leverage: By-product of Margin
When you establish a position with a tiny amount of money, or margin, you are making use of leverage, or better known as gearing. There are many terminologies you need to know in order to comprehend margin trading, such as margin calls, initial and maintenance capital, and negative balance protection.
Margin Calls
It is possible to receive a margin call from your broker when your present position is insufficient in covering the margin requirement due to a loss on a trading position.
Initial Margin
To open a position in the foreign exchange market, you must have at least this amount in your account, which is also known as a deposit margin. A small portion of the total value of the position means that this margin will not cover all of your losses in case the market goes against you.
Negative Balance Protection
When market volatility spikes, traders can use this negative balance protection to stay protected. Traders will not be able to confront a negative balance, in which they owe more than the amount they deposited.
When stop-loss orders and margin calls aren’t enough to keep you from losing too much money while you’re trading forex, this negative balance protection comes in helpful.
Maintenance Margin
Your account will never run out of money thanks to this maintenance margin. Maintaining open positions in the market necessitates having an amount of money set aside to cover any losses. The minimal sum required to keep your trading account active is known as the maintenance margin.
