Foreign exchange is carried out along with a currency trading margin. In the stock market, a margin is the trader’s down payment for an equity purchase in the future. When it comes to the foreign exchange market, a trading margin refers to the deposit that is put into the account of the currency trader. This margin serves as a cover for the account in case of trading losses in the future. The trading of foreign currencies permits a large amount of leverage as a requirement for the margin. There are times, when the ratio of the trading margin is 200 to 1 against the worth of the trader’s forex account.
The Leverage of a Trading Margin
The offered leverage amount is one reason why the forex trading market is highly appealing to a lot of entrepreneurs and traders. A trading margin or trading leverage signifies that the trader does not require an account that is maintaining a full value. Foreign exchange trading offers a large worth of leverage that relies on the instability of primary currencies. The wavering value of the currencies may be 1 percent or lesser. This is relatively lower compared to the changes within the stock market. Stock values change from 5 percent to 10 percent each day. This means that the fluctuations in Forex values are barely noticeable.
The Value of a Trading Margin
If you want to enter the foreign exchange trading market, you will require a minimum balance in order for you to make a trade. This minimum balance is known as the trading margin. When a trader opens an account, the money that is deposited into that account serves as collateral. This covers each currency trade that the trader is carrying out. The deposit is usually 1 percent of the position’s value. If a trader buys a currency pair at $100,000, which is leveraged at a ratio of 100:1, the necessitated deposit is 1 percent or $1000. The rest of the money is used as collateral for the account balance of the investment. When the trader makes a call on the trading margin, he is not charged with interest.
The Risks of Forex Trading Margin
Once the trader opens an account for foreign exchange trading, he has to monitor it regularly. He has to utilize a stop-loss order for each open position. In this way, he will be able to minimize the risks that are involved with currency trading. This is because each increased leverage or currency trading margin heightens the risks of the trade.