Leverage and margin are two important concepts that any forex trader should understand. Application of these concepts will surely help in the process of obtaining mastery of the trade. Also, getting sufficient knowledge of these will most likely be helpful in making the process profitable.
In this section, several questions on leverage and margin are to be addressed. These are the most frequently asked questions.
1. How is margin defined?
Margin, in a general sense, can be imagined as an amount that can be treated as a deposit done in good faith. This amount is usually deposited in order to keep any position open. The margin should not at all be considered as a cost of transaction; it should be treated as a little fraction of the amount contained by your account with the equity of account not included and devoted for marginal deposit. The required amount for margin is usually determined by calculating for the percentage of the size of notional trade plus a small amount that represents cushion. This cushion amount is usually placed on top of the value to account for possible fluctuations that can occur on a regular basis.
2. Before going on to relating leverage and margin, it is important to ask: Why should a forex trader trade on margin?
Trading on margin, also known as trading with leverage is a popular attraction or feature of the foreign exchange market. This kind of trading strategy enables you to start up trades that are way greater than what’s contained by your account. This makes it possible for a forex trader to purchase an account worth $1,000,000 with something that is as small as $100,000 capital in your live account. This is only possible by a 10:1 leverage deal. Trading on leverage and margin is considered as a sword that possesses two sharp edges. It can amplify your profits up to an overwhelming extent. Sad to say, it can also make your losses larger than life.
3. Usually, what leverage is offered by forex brokers?
Usually, a foreign exchange broker gives flexible offers if you have already opened live forex trading accounts. The largest leverage usually offered by any broker can be as much as 200:1. It means that you can purchase a $1,000,000 account with only $5,000 worth of capital deposited in your account. This encourages more people to enter the business. Despite the wide variety of choices, it should be noted that decisions of leverage and margin is still up to the trader.
4. Why do most brokers encourage a lower leverage?
This recommendation is given for a single simple reason. Usually, when you utilize leverage in excess, you can observe that you only need to lose a few trades to negate the effects of your many winning trades. This effect is set off as you lower the leverage.
5. How can the requirements for margin be increased?
For most brokers, the setting for margin, when set at default, will reflect 0.5%. This margin setting can be changed and adjusted based on your preferred leverage and margin once you give your broker a call.
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