How can traders control significantly large positions using a small amount in their trading account? Is that even possible?
The world of Forex provides efficient tools for investors to deal with varying situations such as this one.
We always encounter margin and leverage. These are two of the most important concepts that you need to know when trading in the Forex market. But what are these exactly? More importantly, how can they help traders in managing their funds efficiently?
Take a look at the basics of these tools and understand how it can help you manage your funds properly.
Margin
This is the required deposit for an investor to open and maintain a trading position that is leveraged.
Leverage
Leverage provides you the capability to use a small number of actual trading funds to control larger positions. In the case of Forex, the money is usually borrowed from a broker. Leverage can range from 1:50, 1:100, 1:200, 1:500 and as high as 1:1000.
So how does it work?
For example, $100 dollars in a trader’s account can control a position worth $10000 using a 1:100 leverage.
Leverage offers efficiency for traders dealing with larger positions. But everyone must be reminded that this tool will not always be your friend. As they say, leverage is a double-edged sword. With the increased profits that leverage can provide, in the same way, it can also increase your losses. This highlights the importance of using this with caution in mind.
The level of profits or losses depends on the degree of how Forex margin and leverage are used. Traders are given the opportunity to use these tools to efficiently accommodate a higher trading volume.
You must always keep in mind that for open positions, you should maintain at least the minimum margin required. This measure must be done at all times so any abrupt liquidation of trading positions can be avoided.
