Margin trading: what is it?
All Forex operations are conducted in accordance with margin trading, meaning every participant has a possibility to trade using significantly higher amounts than their account balance.
Margin trading has numerous advantages:
- A modest start-up capital allows a trader to conduct deals with the volumes dozens or even thousands times bigger, which is called "leverage".
- Trades are going on without investing all amount of money, which decreases expenditures and makes it possible to open sell or buy deals.
Margin is measured in percent of the deal volume and depends on the chosen instrument, account type and trade volume. On holidays and weekends margin can grow. A few types of margin are singled out: initial margin, margin requirement, i.e. the one locked up in the account as a guarantee in case of losing position, and minimum margin, maintenance margin, needed to keep the position open. Leverage is a ratio of the margin to the offered sum of money. For example, 1:100 indicates a necessity to deposit 0.01 of the margin to get the full sum, thus a trader's deposit increases 100 times. So having insignificant capital the trader is able to conduct large operations.
In case a trade loses, which increases the minimal margin; it is closed by the broker on default. The position is called “stop out”. Before closing the deal a Forex company warns a trader about needed lift of the margin for the open position which is called “margin call”. In this situation the security deposit is returned with the account of profit or loss.
One of the main marginal trading aspects is choosing the leverage. Keep in mind the average volatility of the financial instrument quotes, as it is not recommended to use high leverage for very volatile instruments.