One reason that many people are attracted to Forex trading is the
amount of leverage that it offers for the small investor. Leverage or
gearing allows you to multiply the effect of your funds, and therefore
generate profits as though you had more money than you actually possess.
There are several financial instruments that allow you to do this, and Forex is possibly the easiest one to access and understand. If you are trading in stocks, even though your broker might allow you some credit you basically have to have the funds to buy the stocks. With Forex, the money you deposit with your broker is only a small percentage of the total value that you can trade.
Your deposit is sometimes called a margin, and your account is called a margin account. Your broker allows you to effectively borrow funds for Forex trading on the basis of the margin that you deposit. Usually the amount you can borrow is expressed in terms of a percentage or a ratio. A frequently used figure is 1:100 or a 1% margin.
Full size trades in Forex involve "lots", which are units of $100,000 or 100,000 units of another currency. If your broker allows you to use a 1% margin, that means that $1000 in your account allows you to trade with as much as one lot, which is a frightening amount of money!
In practice, your broker will not want to expose you or himself to such risk, and will require more funds in your account. This is simply so that any slight movement of the market against you will be covered. Even then, if you have a losing position you may receive a "margin call" from your broker, requiring you to send more money so that you can continue trading.
What this leverage means in practice is that you are able to multiply the funds you have rapidly, should you have a winning streak. A 1% change in price would give you 100% return on your funds, and this is a return which is hard to match in any other market.
It is however a double-edged sword, as a 1% down turn would similarly wipe out your $1000. Therefore it is essential that you take care and know what you're doing when you trade on the Forex markets. You need to be educated in how to trade, money management, and risk control before you put your funds in jeopardy.
The best advice is to always be aware of how much exposure to loss you have. Just because a Forex broker will allow you a 1:100 margin does not mean that you should seek to use all of this, and it is safer to act as though you only have, say, 5% margin so that you do not risk the loss of too much of your capital.
Source: EzineArticles.
There are several financial instruments that allow you to do this, and Forex is possibly the easiest one to access and understand. If you are trading in stocks, even though your broker might allow you some credit you basically have to have the funds to buy the stocks. With Forex, the money you deposit with your broker is only a small percentage of the total value that you can trade.
Your deposit is sometimes called a margin, and your account is called a margin account. Your broker allows you to effectively borrow funds for Forex trading on the basis of the margin that you deposit. Usually the amount you can borrow is expressed in terms of a percentage or a ratio. A frequently used figure is 1:100 or a 1% margin.
Full size trades in Forex involve "lots", which are units of $100,000 or 100,000 units of another currency. If your broker allows you to use a 1% margin, that means that $1000 in your account allows you to trade with as much as one lot, which is a frightening amount of money!
In practice, your broker will not want to expose you or himself to such risk, and will require more funds in your account. This is simply so that any slight movement of the market against you will be covered. Even then, if you have a losing position you may receive a "margin call" from your broker, requiring you to send more money so that you can continue trading.
What this leverage means in practice is that you are able to multiply the funds you have rapidly, should you have a winning streak. A 1% change in price would give you 100% return on your funds, and this is a return which is hard to match in any other market.
It is however a double-edged sword, as a 1% down turn would similarly wipe out your $1000. Therefore it is essential that you take care and know what you're doing when you trade on the Forex markets. You need to be educated in how to trade, money management, and risk control before you put your funds in jeopardy.
The best advice is to always be aware of how much exposure to loss you have. Just because a Forex broker will allow you a 1:100 margin does not mean that you should seek to use all of this, and it is safer to act as though you only have, say, 5% margin so that you do not risk the loss of too much of your capital.
Source: EzineArticles.
