Forex margin trading is usually defined as borrowing currencies to buy securities. Using forex margin trading, you can usually trade up to 500 times the balance of your account. For instance, if you have £1,000 in your account, you can trade up to £500,000 in currencies. While you can have the luxury of trading more than what your initial investment was, you can also stand to lose substantially if the trade goes against your speculations. Given this scenario, traders now are given a margin of 100. This means that with a margin percentage of 1% or 2% and a trading account of £100,000, 99% or 98% is the actual loan from your broker, at no rate of interest.
While there are many benefits of forex margin trading, the likelihood of losses looms large for traders. Seasoned traders say that this type of trading is not recommended for rookie traders due to involvement of high risk. For instance, if you lose 100 pips on your £1,000 trading account, you stand to lose £10 or 1%. But for a margin trade of 50:1 on your trading account worth £50,000 with a loss of 100 pips, you stand to lose 50% of the total capital. A couple of more such ill-fated trades and you can kiss your life as a forex trader goodbye.
Forex Margin Trading – Golden Rules
Never start trading till you are sure you have enough funds in your account
Do not expect to make a killing in the currency market every time you trade. Learn to take losses in your stride. Remember, even the best trader faces the odd off day
Develop your own trading tactic and try not to change it too often. Also, make sure you do not work against your tactic
Do not follow the crowd. In many cases, it has been found that the opinion of the crowd is inaccurate and has led to losses
Leave your emotions at the door and then enter the trading arena. Forex margin trading is no place for emotional people
Talk to experienced traders, search the internet for trading resources, read financial journals, etc., and enhance your knowledge base
Always remember, no technique can guarantee 100% profit. Steer clear of forex “techniques” and “strategies” that claim to make you the next Warren Buffet in less than a year.
