Forex margin trading is a way of applying leverage to increase the purchasing power of your money. Leverage simply means using a small sum to control a much larger sum. This is possible because it is unlikely that the value of a currency will change by more than a certain percentage over a short time. It works by funding your trading account with enough to trade on the margin, which is the amount a currency is likely to fall. Your broker will in effect lend you the balance. It is a technique that the makers of trading robots, like the Forex Megadroid Robot, have attempted to build into their systems.
Trading on margins is also known in stock and Futures Trading, but because of the special nature of currencies, you can get a lot more leverage in the forex market. Each broker has different rules, but it is possible to trade up to 200 times the balance of your trading account.
The possible profits of margin trading is large, but so is the potential losses if it goes wrong. In general, the more leverage you use, the more risky your trading is.
This example will help you better understand this concept.
Imagine that the current rate on the British pound to US dollar forex market is shown as GBP/USD 1.5100. Buying £1.00 would cost $1.51. If you expected the value of the dollar to rise against the pound you might decide to sell enough pounds to buy $100,000. Many brokers us lots of $10,000, making this trade 10 lots. Then you would sit back and wait for the price to go up.
After a few days you see the price is now GBP/USD 1.4600. Sure enough, the dollar has risen and the pound is now worth only $1.46. If you decide to sell your dollars now and buy pounds, you will have made a profit of 3.3% less the spread. 3.3% of $100,000 is $3,300, so that would be an excellent trade.
The problem here is that not many of us have $100,000 available to trade with. This is where the use of Forex Trading margins comes in.
Because you will be trading in several different currencies at any time, the money you need in your account only has to be enough to cover any potential loss. And you would put a stop loss into place to limit that loss, so $1,000 might be all you needed to have in your account to make this $100,000 purchase. Your broker guarantees the other $99,000.
Recently brokers have started to offer limited risk accounts, where your trades are automatically shut down if your account balance hits zero. This prevents you from getting into a situation where, after several losing trades, you end up losing more than you had in the account. Your account is managed by the broker‘s software, that will not allow your account to get into a negative balance. If you trade with a robot like Forex Megadroid, it is possible to adjust the settings to manage this for you too.
Using leverage in this way is so common in Currency Trading that you will soon do it without even thinking about it. Still it is important to keep in mind the risks. Lower leverage is always safer and you may never want to go to the maximum forex margin that your broker would allow. Some people do prefer to use automated systems to manage this type of trading for them, you can download Forex Megadroid yourself and test it on a demo account first.
