Leverage is normally quoted in ratio terms, such as 50:1. This means you can trade 50 currency units but only have to put up 1 unit. So to trade $50,000, you would only need to put up $1,000.
Margin is the same thing, but seen from a different point of view. Margin is usually quoted in percentage terms, like 10% for example. So you can trade $10,000 of currency but only have to put $1,000 down. The advantages to this are obvious.
Margin is used by successful Forex traders to boost their profits. The value of a single pip is often low so you have to trade a lot of currency to make profits. Small investors without a lot of capital can use leveraged trades to make good profits. Margin, however, does work both ways and you need to use it prudently or you might find yourself with no money left sooner than you had thought possible.
When you first open your Forex account with a broker, you will need to place a minimum amount of funds into your account before you can do any trading. The minimum amount varies from broker to broker.
When you trade, some of your account balance is earmarked as the initial margin requirement for the trade in question. Here is an example:
Let's say you open an account and deposit $10,000 into this account. Then you trade at 100:1 leverage. You have to put up $1,000 to buy $100,000 of currency. You have $1,000 in used margin and $9,000 left in unused margin.
You need to carefully keep track of how much margin you have left because, if you make bad decisions and prices move against you, some of the $9,000 will be used to compensate for your losses. If your remaining margin is getting very low, your broker will liquidate your positions, meaning a big loss for you. This does, however, stop you from losing more that you could if they left your position open and the prices kept going against you, so it is still an advantageous way of trading.
Nobody looks forward to getting a margin call but you can use stop-loss orders to avoid it. Stop-loss orders cut your losses before they get near the liquidation point and are well worth using.
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