Two of the most important concepts that traders need to know are leverage and margin. If you want to become a profitable trader in the market, you need to know about these terms. A margin is the loan given by your broker that allows you to put up your funds and the securities in your account and use them as leverage in order to engage in larger trades.
However, in order to get approval for using margin, you will need to open a margin account. The collateral for the loan is the securities and cash that you deposit in your margin account but the money you borrow to use as margin doesn’t come for free. You will have to pay an interest on the amount that you borrow. In general, you can expect to pay interest rates of anywhere between 5-10% on the margin.
Just like margin, you should know about leverage as well. You can use the margin in order to create more leverage. Simply put, the additional buying power afforded to margin account holders is known as the leverage. In layman’s terms, you will be able to pay less than the full price of any trade, thus making it easy for you to enter much bigger positions, which would not be possible if you were simply using the funds in your account. If you were to talk to a forex broker, they would generally express the leverage in a ratio.
Most reputable brokers leverage in a ratio of 1:100. However, there are certain brokers that offer leverage as high as 1:400. This means that if you had $1,000 in your account, you will be able to make trades as high as $400,000. While this may seem like an excellent idea, you should know that you will also lose money 400x times faster. Using too high a leverage is generally frowned upon in the forex industry. If you end up losing a single trade, you will have to pay back a very high amount.
Another important thing that you should know about using leverage is over trading. As a forex trader, it is your job to make sure that you set up a proper trading routine. The forex market remains open round the clock and many new traders often get stuck in to the excitement of trading and trying to make more money. The added advantage of round the clock trading, coupled with the additional leverage, means that many people feel often end up over trading.
Over trading is a seriously bad thing, and you will easily end up losing a huge amount of money within a matter of minutes. The reason why so many brokers offer such high leverage is because they know most traders are easily tempted. If you want to avoid losing money in the long run, it is generally advisable that you set up a specific trading routine. This way, you will be able to make more profitable trades in the short term.
Post a Comment
Note: Only a member of this blog may post a comment.