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!
|You buy 100,000 pounds at the exchange rate of 1.5000||+100,000||-150,000|
|You take a power nap for 20 minutes and the GBP/USD exchange rate rises to 1.5050 and you sell.||-100,000||+150,500|
|You have earned a profit of $500.||0||+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When you decide to close a position, the deposit (“margin”) that you originally made is returned to you and a calculation of your profits or losses is done.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.
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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