Margin can be conceived of as a good faith deposit or collateral required to initiate and maintain a trade.
Margin trading allows you to enter positions that are larger than your account balance.
Although buying and selling on margin does not in and of itself provide leverage, it can be employed as a kind of leverage.
This is because the size of the position you can open is normally determined by the amount of money in your account.
Margin trading in currencies allows you to improve your purchasing (and selling) power.
This means that if you have $5,000 in a margin account with a leverage of 100:1, you can trade up to $500,000 in currencies because you only have to post 1% of the transaction price as collateral.
Another way to put it is that you have $500,000 in purchasing power.
With higher purchasing power, you may enhance your total return on investment while spending less money. However, trading on margin magnifies both your gains and losses.
Every trader dreads the dreaded margin call.
It’s not a pleasant sensation.
This happens when your broker alerts you that your margin deposits have fallen below the required minimum amount due to an open trade that has moved too far against you.
While trading on margin can be beneficial, it is critical that you recognize the hazards.
Make certain that you fully understand how your margin account works, and that you have read the margin agreement between you and your broker.
If anything in the agreement is confusing to you, always ask questions.
If the available margin in your account falls below a specified threshold, your positions may be partially or completely liquidated.
You might not get a margin call before your positions are liquidated (the ultimate surprise birthday present).
If the funds in your account fall below the required margin (usable margin), your broker will liquidate some or all open transactions.
Even in a volatile, fast-moving market, this can assist keep your account from slipping into a negative balance.
Margin calls can be efficiently avoided by regularly monitoring your account balance and using stop loss orders on any active positions to limit risk.
Keep in mind that when the market is moving quickly, your stop loss may face significant slippage!
Margin is a difficult subject and some claim that having too much margin is dangerous. It all relies on the individual and his or her level of knowledge and training.
If you are going to trade on a margin account, you must be aware of your broker’s margin account policies as well as comprehend and be comfortable with the risks associated.
You should also be aware that most brokers demand a larger margin on weekends. This may be a 1% margin during the week, but if you intend to maintain the position over the weekend, it could be 2% or higher.