Forex Tutorial
August 23, 2016

FX Margin trading: How to Understand It? | FX Margin trading

Taking into account the possibility you don’t know what Forex margin is we want to concentrate on its main functions and definition. Forex margin stands for a tool applied by a FX broker into the brokerage accounts to render his/her clients with an opportunity to gain an access to more transactions than are allowed by their current cash holdings. Margin lets both brokers and traders of Forex get only benefits from using this tool. You see, by using Forex margin investors can have larger returns comparing with those which are commonly offered for them while FX brokers in their turn can benefit from extra commissions required by the larger trading positions.

FX Margin trading: How to Understand It?

For sure FX margin trading is commonly leveraged on the high level to make it possible for traders to benefit from small fluctuations happening in the currency valuations. Before a FX trader starts a speculative position in the currency’s value he/she should be quite aware of the Forex margin origin. In order to find this information you can use the following tips:

1) A trader has to determine foremost Forex leverage which is provided by a FX broker. Simply call your broker or send him/her an e-mail. According to the latest U.S laws Forex brokers can provide for their clients offers suggesting up to 100X leverage opportunities. It denotes you as a trader can get an access to a 100 USD trade by investing only one real dollar. Many traders will notice that in other countries leverage opportunities are even higher : for example the United Kingdom can offer leverage up to 200X.

Suppose, you intend to speculate on the value of EUR against the USD, and suppose that the conversional rate equals 1.33. Your broker will definitely ask you something about 1.5 as the conversional rate for this trade to render not meaningful changes within this rate. The conversional rate is usually changed by a broker if he/she notices fluctuations of the currency value. If we have for a trade the standard leverage of 100X then the minimum Forex market margin balance for a unit of such trade in the pair EUR/USD equals 150 (1.5×100).

2) The last thing you need to do is to divide your cash holdings within the Forex brokerage account by minimum Forex market margin balance conditions for the currency you want to trade. If you have three thousands of dollars and intend to trade EUR/USD at 150 dollars as the minimum margin you can transact no more than 20 contracts according to your account’s size. Keep in mind that the same contract/transaction without any FX margin will require from you 300 thousands of USD at your account.