Understanding Forex Margin and Forex Leverage

A forex trading margin account can benefit you greatly if you know how to manage it. For just a small amount down, large currency positions can be purchased on margin.

The is referred to as Forex leverage, and allows you to increase your gains by a large factor. Of course this also applies to potential losses, which means you need to employ sound risk management strategies when taking advantage of forex trading leverage using margin accounts.

Forex leverage of 100:1 is commonly found in online trading accounts. This means with only 10 units, you can trade 1,000 currency units. So if you want to trade $100,000 you simply need to have $1,000 in your account.

Forex margin is simply leverage seen from a different perspective. Percentages like 10% are used instead of ratios. Assuming then 10% margin, for $1,000, you can trade $10,000 worth of currency.

In order to make large profits, accomplished traders will employ margin. After all, the low value of a forex trading pip calls for trading substantial currency lots before a reasonable profit can be made.

Thus, even small investors with little capital can use Forex leverage to make relatively substantial profits. Just keep in mind that leverage is a double edged sword that can render bankrupt those who use it recklessly.

In order to trade with a broker, a minimum amount of funds is required upon opening a Forex margin account. Brokers have different minimum account requirements.

Then when you make a trade, a portion of your account balance will be set aside as the initial margin requirement. Here is how it works:

You deposit $10,000 into your account. Then a trade is initiated where the leverage is 100:1. So your $1,000 gets you $100,000 worth of currency. You now have $9,000 Forex margin available, having used $1,000 of your margin.

You must know your available margin at all times. A portion of your $9,000 available margin will be set aside for losses should the movement of prices be unfavorable to you.

If losses pile up and your account balance slides, the broker can opt to liquidate your position and you will be looking at a substantial loss. By doing this, they are actually helping you avoid a substantial losing streak.

Of course a forex margin call is something we never want to experience. Through the judicious use of stop-loss orders, you can take advantage of forex trading leverage while at the same time taking steps to minimize your losses.

With so much at stake with leveraged trades, it makes good sense to be sure you get some professional training to avoid common pitfalls of forex trading, and to gain access to proven techniques to take advantage of forex leverage while minimizing your risk. Here are some excellent resources to get you started on the right track:

1. Forex Trading Made EZ (Easy)

2. Forex Mentor by Peter Bain

3. Forex Profit Accelerator by Bill Poulos