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Leverage Upto 200:1 in Forex Trading

Margin trading refers to the leverage amount given to the traders to trade in the market.

One of the best features in Forex trading is that traders are able to trade foreign currencies with high margin. You get 1:1 margin for stock exchanges, 2:1 margin for equity trading, 15:1 margin for futures market; but in Forex, normal trade margins are 100:1 and 150:1, or even 200:1 trade margins.

Typically the broker will require a minimum account size, also known as account margin or initial margin. Once you have deposited your money you will then be able to trade. The broker will also specify how much they require per position (lot) traded. For example, for every $1,000 you have, you can trade 1 lot of $100,000. So if you have $5,000 they may allow you to trade up to $500,000 of Forex.

The minimum security (margin) for each lot will vary from broker to broker. In the example above, the broker required a one percent margin. This means that for every $100,000 traded, the broker wants $1,000 as a deposit on the position.

Trading Forex in huge margin with allows traders to control a large sum of money with little cash put on the tables. This in turns magnify the ROI dramatically.

Margin Trades and ROI in Forex

Example below shows how margin tradings in Forex can magnify your investment ROI.

Taking $1,000 in a 100:1 margin account as example, you are now granted the purchase power of $100,000.

Say that you execute the trade between USD/JPY: Long Japanese Yen in USD/JPY 109.2 (meaning buying 109.2 Yens with 1 USD) and short JPY at the price of USD/JPY 109.0.

Trading without margin

If you are trading without margin, you have only $1,000 of buying power. The the max you can go is buying (1000 x 109.2) Yens = 109,200 Yens. Later when you sell off your Japanese Yen in higher price (USD/JPY 109.0), the returns you are getting back is $1001.8.

Profit made in the trade: $1.8
ROI of the trade: 1.8/1000 x 100% = 0.18%

Trading with margin

Now in case you are trading with margin of 100:1, the calculation of the trade will be giving you a total different picture:

Buying Japanese Yen when USD/JPY 109.2:
Long Japanese Yen = (100 x 1000 x 109.2) Yens = 10,920,000 Yens; Short USD $100,000.

Selling of Japanese Yen when USD/JPY 109.0:
Short Japanese Yen = 10,920,000; Long USD = (10,920,000 / 109) = $100,183.5.

Profit made in the trade: $183.5.
ROI of the trade: 183.5/1000 x 100% = 18.35%

Managing a Margin Forex Account

Although the example given is much simpler than what's happening in real market situation. But it cleary illustrates that trading in can easily magnify trade's ROI in a dramatic way. Although trading on margin sounds extremely easy to gain profits, but it is important that traders understand well the risks they are undertaking.

Traders should be very aware of the margin call and should always avoid them at all cost. Note that in the event that money in your account falls below predetermined threshold (Margin Call), the positions in the account could be partially or totally liquidated, even it's in a highly volatile, fast moving market. Also, traders should always monitor own margin balance on a regular basis and utilize stop-loss orders on every open position to limit downside risk.

In most cases, you might need a computer aided trading tools to determine the entry point as well as stop loss order. Trading tools DashBoard FX is currently pushing out tons of useful features in their software and they provide free tipping service from time to time - perhaps you should take a look on them. Visit DashBoard FX official website.

Moving on: Major currency traded in Forex market

Next, we will learn about the major currency traded in Forex market.

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