Margin Trading

Margin trading allows you to trade on credit using the broker’s money.

When you trade with leverage, you wouldn’t need to pay the 10,000 euros upfront. Instead, you’d put down a small “deposit”, known as margin.

Leverage is the ratio of the transaction size (“position size”) to the actual cash (“trading capital”) used for margin.

For example, 50:1 leverage, also known as a 2% margin requirement, means $2,000 of margin is required to open a position size worth $100,000.

Margin trading lets you open large position sizes using only a fraction of the capital you’d normally need.

This is how you’re able to open $1,250 or $50,000 positions with as little as $25 or $1,000.

You can conduct relatively large transactions with a small amount of initial capital.

Pay attention here because this is very important!

Example of the Power of Margin

• The signals in the market are indicating that the British pound will go up against the U.S. dollar.
• You open one standard lot (100,000 units GBP/USD), buying with the British pound with a 2% margin requirement.
• Then, you wait for the exchange rate to climb.
• When you buy one lot (100,000 units) of GBP/USD at a price of 1.50000, you are buying 100,000 pounds, which is worth $150,000 (100,000 units of GBP * 1.50000).
• Since the margin requirement was 2%, then US$3,000 would be set aside in your account to open up the trade ($150,000 * 2%).
• You now control 100,000 pounds with just $3,000. 
• Your predictions come true and you decide to sell. You close the position at 1.50500. You earn about $500.

When you decide to close a position, the deposit (“margin”) that you originally made is returned to you and a calculation of your profits or losses is done.

This profit or loss is then credited to your account.

Let’s review the GBP/USD trade example above.

• GBP/USD went up by a mere half a pence! Not even one pence. It was half a pence!
• But you made $500!
• While taking a power nap!
• How? Because you weren’t trading just £1.
• If your position size was £1, yes, you would’ve made only half a pence.
• But…your position size was £100,000 (or $150,000) when you opened the trade.
• What’s neat is that you didn’t have to put up that entire amount.
• All that was required to open the trade was $3,000 in margin.
• $500 profit from $3,000 in capital is a 16.67% return! 😲😲
• In twenty minutes!
• That’s the power of leveraged trading!

A small margin deposit can lead to large losses as well as gains.

It also means that a relatively small movement can lead to a proportionately much larger movement in the size of any loss or profit which can work against you as well as for you.

You could’ve easily LOST $500 in twenty minutes as well. 

High leverage sounds awesome, but it can be deadly.

That is why proper risk and money management is immensely important.

For example, you open a forex trading account with a small deposit of $1,000. Your broker offers 100:1 leverage so you open a $100,000 EUR/USD position.

A move of just 100 pips will bring your account to $0! A 100-pip move is equivalent to €1! You blew your account with a price move of a single euro.

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