You are probably wondering if a small investor like you can make such a large deal.
Think of your broker as a bank that is basically offering you $ 100,000 to buy you currency.
The bank only asks you to give you $ 1,000 as a sincere deposit. This is retained for you, but not necessarily.
Isn't it too good and true? This is how leveraged forex trading works.
For example, if the leverage allowed is 100: 1 (or 1% of the required positions) and you want to trade a position worth $ 100,000, but your account has only $ 5,000.
No problem. The broker can secure a down payment of $ 1,000 and "borrow" the rest.
Not surprisingly, any loss or profit will be deducted or added to the remaining cash balance in your account.
The minimum margin (margin) for each lot is different for each broker.
In the above example, the broker required a margin of 1%. This means that for every $ 100,000 traded, the broker wants $ 1,000 as a deposit for the position.
Suppose you want to buy one standard lot size (100,000) USD / JPY. If your account leverage is 100: 1, you will need to enter $ 1,000 as a margin.
$ 1,000 is a down payment, not a fee.
When you close your transaction, you will get it back.
The reason brokers demand deposits is that there is a risk that you may lose money in that position while the transaction is open!
Assuming this USD / JPY transaction is the only open position in your account, you should always maintain at least $ 1,000 equity (absolute value of your trading account) to keep the transaction open. I have.
If the USD / JPY plummets and the equity of your account falls below $ 1,000 due to a transaction loss, the broker's system will automatically close the transaction to prevent further losses.
This is a safety mechanism to prevent your account balance from becoming negative.
Understanding how margin trading works is so important that we devoted the entire section to it later in school.
A must-read if you don't want to blow up your account!
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