How does margin trading in the Forex market work?

Answer:

Margin account, in essence, involves borrowing to increase return on investment. Investors often use margin accounts when they want to invest in stocks using leverage borrowed money to control bigger positions than they would otherwise control with their own invested capital. These margin accounts is the broker of the investor and are settled daily in cash. Margin accounts are not limited to stock — they are also used by currency traders in the Forex market.

For starters, investors interested in trading on the Forex market, you must first register using a normal broker or an online Forex discount broker. Once an investor finds a proper broker, margin account needs to be configured. A Forex margin account is very similar to the margin account stock — the investor takes a short-term loan from the broker. Credit equal to the amount of leverage taken on by the investor.

The investor must first Deposit money into the margin account before the transaction can be placed. The amount that must be deposited depends on the margin percentage agreed between the investor and the broker. For example, accounts that will be traded in 100,000 units or more, the margin percentage is usually either 1% or 2%. So, for the investor who wants to trade 100,000, a 1% margin would mean that the $1,000 should be credited to the account. The remaining 99% is provided by the broker. No interest is paid directly on this borrowed amount, but if the investor does not close his position before the delivery day, it will have turned over. In this case, the interest may be deducted depending on the position of the investor (long or short) and short-term interest rates in the underlying currencies.

In a margin account, the broker uses the $1,000 as a Deposit of sorts. If the investor’s position worsens and his approach losses of$ 1,000, the broker may initiate a margin call. When this happens, the broker will usually instruct the investor to either Deposit more money into the account or close out positions to limit risk for both parties.

For more information, see getting started in Forex tutorial the Forex market and getting started in foreign exchange futures.

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