You should not make a trade without knowing exactly how much money you are putting on the line. With a leveraged forex trading account, you stand to lose an amount of money larger than the actual dollar amount that you invested in the trade as equity. The higher your leverage ratio is, the more you stand to lose. You can determine how much money you are required to put in with a margin calculator. The actual gains or losses are then calculated based on your leverage ratio. What the margin calculator tells you is whether or not you have enough in your account to invest in opening a position in your currency pair of choice.
The margin requirement that comes out in a margin calculator will be the amount your forex broker will require you to put in as your investment – you can have more than this in your trading account but not less. It is important to know that as currency prices change, so will your margin requirement. Therefore, if you do not have much left on your trading account when your margin requirement increases, you will have to close your position and take a loss. In a highly leveraged forex trading account, this could mean a huge amount of money that you will have to pay up.
Although a highly leveraged forex trading account brings forth the possibility of huge gains, it is not always advisable to put up a small margin with a higher leverage unless there is a strong favorable trend that can be relied on within your time horizon. The risks involved in margin trading with a highly leveraged account can work toward the demise of your forex trading account. Wise money management principles advice you to put in only a percentage of your disposable funds or the money that you intend to use as your trading capital. You should not put all your money in your trading account. Your margin calculator will give you an idea of how much to keep in your trading account enough to keep your position open.
With only a small amount of money in your trading account, you can get out of your open trades and close with minimal losses in case the market moves in the opposite direction of what you expect. You would then have some amount of money left to put into your trading account to get back in the game – hopefully on a much wiser outlook about making your trading decisions. Use your margin calculator again before you open your position to determine the amount of money you need to enter another position.
If you are holding more than one forex trading position, a margin calculator helps you determine whether or not you still have enough money in your trading account to invest in opening another trade. For every position that you open, your available balance in your trading account to be used for your margin trading decreases. Be sure to leave some room in your trading account balance for movements in price fluctuations to avoid margin calls and loss of trading capital.