This Article is About
unfortunate case
maintenance level
lending money
initial investment
forex trading
downside
leverage
correlation
currency
Margin Trading With Currency
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Margin Trading is used extensively to make larger purchases than otherwise possible. Margin trading allows you to greater benefit from small fluctuations in a currency due to the high quantity of currency that you have purchased.

A margin trading account is usually used in high values to provide you a higher leverage on your investment. The downside to this leverage is unlike regular Forex trading, you can be left in debt. One must always remember than when using a margin account you are physically lending money. Loaning money to be spent on a prospective investment can be risky and you should consider all factors carefully before making use of your margin account. A margin account allows you to leverage up to 50% of your initial investment, but is different to a cash trading account in the sense that you can lose more than your initial investment.

When making use of a margin account a maintenance margin is set in place to protect the investor. A maintenance margin is the percentage of equity in your account required to cover your margin. If I have $5000 dollars invested through a brokerage and I now have been granted $5000 by the margin account I double my buying power. With this I purchase currency to the value of $10 000. On this $10 000 I have a maintenance requirement of 20%. Should the value of my trades drop to half their original value, $5000, my maintenance amount will be $1000. I had originally invested $5000 of my own money so I am still in the clear, but as you can see should the value of my currency drop lower, I could be left in debt. In the unfortunate case that your maintenance margin drops below your invested equity the broker may instate a margin call.

A margin call is the act of the broker selling your securities to increase your invested equity in order to keep you in correlation to your margin maintenance level. When entering into any margin account arrangement please understand all aspects of your agreement. Read all of the terms and conditions, as should your broker be forced to do such, you have no control whatsoever. You cannot decide which currency investments will and will not be sold, they could even end up all sold depending on your deficit!

Always take commissions and administrative costs into consideration when using your margin. Without factoring in these costs it can be quite easy to lose money without first realising how. Precise and diligent research and planning is the key to any investment strategy.

Margin trading may allow you to purchase more, therefore amplifying gains and losses in trading, sometimes by huge factors. It is due to this volatile nature and unpredictability that I recommend that most beginners leave their margin untouched until they understand trading more completely. If you do make use of a margin remember that you do not need to use the entire amount, invest wisely and minimize your risk. This form of trading may not be for everyone but nonetheless it is a facility available to those who are willing to accept the risks involved in return for high possible rewards.


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