Forex Margin Trading
By: Charley Warady
To put it very simply, Forex margin trading is the ability to trade on somebody else's money. The downside of this, of course, is that you're liable for the money. It is, after all, borrowed money. All Forex brokers allow Forex margin trading and it is a common practice. The market really couldn't exist otherwise. What happens is that the Forex trader has to maintain in his account a certain percentage of the amount he is going to trade.
The ratio you're allowed to borrow against the amount of cash you put up is determined by each individual broker, but you'll find that Forex margin trading is pretty standard as far as the ratio is concerned.
Profits are determined taking everything into account, and so are losses. You must maintain a minimum amount of cash in your account in order to sustain the account. If the money drops below the established minimum, the Forex trader is placed on margin call.
Being on margin call
When your Forex margin trading minimum is not met, the broker needs more money. The Forex broker is willing to put up risk as far as a Forex trader's open positions, but the trader must take responsibility for his trades. The Forex market is one of the most volatile in the world. That's what makes it exciting, and often times very profitable. But there are times when the market is going to go against you, you'll have a few positions open, and there becomes a need for a margin call.
The most common way of preventing a margin call in Forex margin trading is to simply limit your open positions, which obviously lessens your exposure to risk. Scalpers that never have open positions, and even day traders that never go home with an open position are pretty much immune to the situation.
The longer term Forex trader should be careful. Good money management is the key to avoid a margin call. Don't go crazy and don't try to play catch-up. It so rarely works it's never worth trying.
The stop loss is always your friend and a good limiter of the margin call. If you are managing your profit/loss ratio accurately with well placed stop loss orders, you should be able to keep your margin where it should be for the long term. It's all key to Forex margin trading.
Keep your margin up
You should never have to trade scared. If you're seeing your Forex margin trading account dropping, make sure you have a cushion so as to be able to trade the Forex market comfortably. If you don't have the money to deposit, then lower your quantities until your margin is back up to where it should be. Do not, under any circumstances, 'give it a shot.' You will be setting yourself for failure and a prospect of a new career.
Manage your Forex margin trading. Not just your quantities of trades, but also the amount of pairs you are in. The theory of 'if you throw enough stuff against the wall, something is going to stick' does not apply to trading Forex.