Most novice forex traders do not truly understand how margin trading is done. For them, the margin is simply a way to trade with a larger position size. However, it is actually a lot of misconceptions about trading with margin that could prevent you from utilizing this margin effectively.
Margin represents money that is borrowed. There is a myth that stems from a misunderstanding of how the margin used in forex trading. Margin in forex is actually known also as a "performance bond" because it represents the amount of money you need to make sure your losses can be covered. To illustrate, let's say You want to open a position worth 150.000 u.s. dollars. Because of the margin requirement was 2%, then you are required to deposit 3.000 Us dollars on your trading account. This amount is intended to cover any losses that may occur when You trade.
How about $ 147.000? isn't that the money borrowed from a broker? No, because when you trade forex, you are not actually buy or sell currencies, but only an agreement to do that. Thus, there is no need for borrowed real money.
You can only close the margin requirements with cash (cash). You can also open a new position could produce a profit to increase your margin. This is why the amount of capital in your trading account, known as equity (equity), calculated as the sum of cash plus the profit from trading positions still open reduced losses from open positions. This means that your equity continue to fluctuate over time as changes in currency values in the market.
However, it can also be beneficial to you because, if nothing is done, a margin call is a broker can only shut down some of your trading positions which are to meet the requirements of equity loss margin again.
Forex trading is very risky because of the high leverage is used. But even though there are indeed a number of specific risks related to currency trading, that risk is not of public oversight. The reason is because regulators already limit the leverage ratio may be offered, such as in the US. Before 2010, traders can enjoy a leverage ratio of up to 1:400, meaning that with only 100 U.s. dollars in trading accounts, they can open a position worth up to 40.000 u.s. dollars. But lately the U.S. regulators restrict leverage ratio up to 1:50 course even for brokers based outside the country. This restriction has limited risk in forex trading significantly.
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