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Forex Margin

Forex Margin is the key which has unlocked the opportunity for retail traders to profit from changes in currency prices. Until the late 1990’s foreign currency trading was within the reach of only big banks and other large financial institutions. The concept of margin has stemmed from stock and futures trading and is today helping small retail traders around the world to participate in the foreign exchange market. However, a large majority of traders lose because they do not understand how this key concept works.

Forex Margin is the amount of money required by a forex broker from a forex trader to open a trade or position in the foreign exchange market. For margin trading of 1% the broker will ask you to deposit $1000 in your account. Basically you provide just $1000 of your trading capital, and the broker will then allow you to trade up to $100,000 worth of currencies. Technically speaking you can leverage your trading account by 100 times.

Retail forex brokers always quote currency pair such as GBP/USD (i.e. GBP in terms of USD). If GBP/USD is trading at 1.5000 then it means that one British Pound is worth 1.5000 US Dollars. Now if you want to buy 10,000 Pounds it means that you have to sell 15,000 USD. Basically your margin required will be 1% of $15,000 which equals $150.00. As you can see here with only a small amount of money you are able to buy a much larger amount of currencies.

Now let us see how this can work against a forex retail trader.

You have 2 trading accounts with two different brokers, Broker A has 2% margin requirement and Broker B has 1%. We consider the above example of the GBP/USD trading at 1.5000. You have a capital of $5,000 in your trading account, and trade mini 10K lots which means that when price goes up by 0.0001 or by a pip, your profit increases by $1 dollar, but if it falls by one pip you lose $1. We also assume that you want to put $300 as margin on each trade. Please visit:- fx사이트

With Broker A the margin required is 2 % and so you will put $300 (2% x $15000) as margin and thus buy 1 lot of GBP/USD. But with Broker B given the margin required is 1 % you will need to put only $150 and so you buy 2 lots. Now let’s say that the trade is a bad one, and the GBP/USD moves 50 pips in the wrong direction. With broker A you lose $50 ($1 x 50 pips x 1 lot) but with broker B you lose $100 ($1 x 50 pips x 2 lots).

So with broker A you have leveraged your account by 50 times but with Broker B you have used a leverage of 100.The main point that you should understand here is that though Broker A requires you to put more money as margin you are in fact facing less risk than with Broker B. This has been indeed the basic argument for the recent proposition of the Commodity Futures Trading Commission (CFTC).

On Jan.13 2010 the CFTC proposed to limit leverage in retail forex customer accounts to 10-1. The proposal was part of a larger regulatory overhaul of retail forex by the CFTC, enabled by authority granted to it in the Food, Conservation and Energy Act of 2008, or the Farm Bill. In effect a limit to leverage will clamp down on the potential of forex margin. This is because reducing leverage implies that the retail trader will have to put more money to trade the same amount currencies.

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