Importance of Margin and Leverage in Forex Trading

Margin and leverage are important concepts to consider while trading the forex market. These important tools allow fx traders to manage trading positions which are significantly larger in size than would be the case without using these tools. It is necessary for experienced traders and new traders to fully understand the concepts of leverage and margin on any forex markets. Too many new traders are eager to start fx trading and fail to understand the importance and effect that these two crucial success factors would have on their future success outcome.

Leverage trading allows Forex traders to access markets that would otherwise be limited based on the size of their capital size. Leverage helps traders to access positions that would otherwise be able to afford more lots, more contracts, more shares etc. It is a basic trading strategy that carries a high degree of risk but as forex rates move very slowly and steadily (in terms of real value change), the vast majority of traders leverage their accounts while participating in trading.

Most Forex market brokers allow a very high leverage ratio, or to put it another way, need a very low margin. That’s why gains and losses can be so high in forex market trading while the real currency rates themselves don’t change too much surely not like stocks prices. Stocks can either double or triple or fall to zero; currency never does. Since currency rates do not differ greatly, conditions for lower margins are less risky than would be the case for stocks.

For many traders, the use of margin in forex trading is not a new idea. Margin is a strong deposit of trust that a trader puts in to keep a spot open for collateral. It is not necessarily a transaction expense, but a part of your account equity that has been set aside and allocated as a margin deposit. It is important to note when trading with margin, that the amount of margin needed to keep a position open will ultimately be dictated by the size of the transaction. As the size of the trade increases the demand for margins will also increase.