Leverage, margins, and margin calls are some of the many terms you will come across more often while trading currencies. In this article, we will shed light on what each means so that you can know how to use, or avoid them in while trading effectively.
In forex, Leverage means borrowing. It gives the trader the opportunity to multiply or maximize their returns and asset, buy using a little of their own investments. While the main aim of leverage is to maximize the profits, it can also cause losses. When a trader decides to join the forex market, they must first open a margin account with the help of a reliable broker such as Saxo. The amount of leverage which is usually provided can be 200:1, 100:1, or 50:1. Traders using leverage need to be extremely cautious because it can sometimes turn to be a catastrophe.
A margin is among the most crucial forex trading concepts. Although most traders don’t understand it, the forex margin is a good faith deposit needed to maintain the open positions. Am margin is not a transaction fee or cost, but rather a portion of your account equity set aside as the margin deposit.
Margin trading has both positive and negative implications. This means that it can augment both profits and losses. Basically, your forex broker takes the margin deposit, and then pool sits with other traders’ margin forex deposits. This is mainly done with the aim of placing orders within the interbank network.
A margin is usually expressed as a percentage of the selected positions full amount. For example, most forex margin requirements range between 0.25% and 2%. You can calculate the maximum possible leverage that your Singapore online trading account can yield based on your broker’s margin requirements.
In forex, a free margin is the amount of money that does not get involved in any trade. You can, however, use to acquire more positions. If you open more positions, you will have more profit, and yield more equity, and freer margin.
Forex margin level
You must understand all the margin levels better for you to understand forex more. The forex margin level is among those margins you have to know about. It is the percentage value based on the usable against the already used margin. In simpler words, it is the equity to margin ration
Margin level = (equity/margin) × 100
The margin level is fundamental to brokers as it helps them to determine whether they can undertake new positions or not. The limits vary between different brokers, but the most standard limit is 100% and is known as margin call level. When your limit reaches the 100% number, you may choose to close your positions or not, but you cannot take other new positions.
A margin call takes place when an investor borrows some amount of funds from their broker to use them for investments. Since it involves borrowing, it is one of the many nightmares that forex traders never wish to do. Usually, the investor pays back the borrowed funds using the combination of their own money and the borrowers’ funds. A margin call is usually triggered when the investor’s equity fall below a specific percentage requirement knows as the maintenance margin. The maintenance requirement varies among different brokers, but the federal law states that the minimum maintenance should be 25%.
A margin call can be a profitable strategy in the forex market, although the involved parties must be made aware of the potential risks expected. You should also be made aware of how tour forex account operates, and also know how to read the different margin agreements. Also, be sure to ask anything that you don’t understand.