Margin Trading on Forex and CFDsBarry Copeland 22 / March / 18 Visitors: 540
All participants in the Forex community are familiar with the term "shoulders". Everyone has heard of it, but unfortunately only a few people understand what shoulders, margin, CFDs are and how these parameters affect trading. That is exactly what we are going to talk about today.
Margin Trading: What is it?
We will try to answer this question simply and clearly, even for beginners. Trading on margin (i.e. using leverage) is exactly the tool that allows each Forex trader to make trades in volumes that will exceed their equity capital many times.
That is, a trader, using the opportunities of margin trading, uses a small percentage of his money when making a deal, but at the same time has the right to count on increased profits.
Roughly speaking, margin is the ratio of trader's funds to the total amount, which is expressed as a percentage.
Pluses and minuses of margin trading, risks
based on the above, it is logical to highlight the benefits that trading using margin provides to the trader:
Trading in large lots is allowed, which increases the likelihood of own income (personal capital can be quite modest);
no matter what currency the trader has opened his account in (open a forex demo account), he is able to trade on any instruments;
a number of particularly expensive assets can be distinguished in the market. It is margin trading that allows you to work with them, not limited to the amount of equity capital.
But there are also some pitfalls. The possibility of margin trading relaxes the trader (especially a beginner). Having got carried away in trading on credit funds, a person can make a number of fatal mistakes, which will lead to a complete withdrawal of the deposit. And then, as in a circle: replenishment, plum-subsequent replenishment. And if you do not get out of this vicious circle of permanent lending in time, and to complete bankruptcy is not far away.
What kind of recommendation can be made here? Perhaps, just one: always remember about high risks and learn to use stop-losses in trading as soon as possible - a special tool to limit losses.
How is the margin calculated?
Actually, there is nothing difficult in calculating the margin. To do this, you need to divide the volume of a particular transaction by the size of the leverage and then multiply it by the current currency quote. The result obtained is the exact amount that will go into the broker's pocket in case of a failed transaction.
We will not even give specific examples of calculation here, as now every serious broker has taken care of this in advance. As a rule, a special calculator is already placed in the trader's account, where one only needs to set the parameters of a specific trade.
Leverage free trading: is it real?
Undoubtedly, the use of leverage in trading is not a mandatory requirement. But you will also make profit only when:
You have large funds at your disposal to open a deposit. And, take your word for it, the amount should be much more than a few thousand American rubles. Only in this case you will be able to rejoice at an adequate profit;
you've learned to catch sharp moves and you're very good at fundamental analysis. In this case, the requirements for the initial deposit amount are slightly reduced, as you can catch 100-200 points of profit in a single deal on the news in a favorable scenario.
That is, trading without using leverage is available from a technical point of view, but for this you need to have serious funds and professional trading skills. At the same time, you can not even count on serious profit figures in percentage terms. 0.5-0.7% of the deposit per month - this is the real data on trading with 1:1 leverage. And such results are more suitable for large participants of the currency market with millions of turns, but not for a simple trader.
We sum up the results.
What conclusion can be drawn from this? Of course, leverage is a real salvation for those who want or have already started trading in the foreign exchange market, but do not have the required stock of their own funds.
The possibility of margin trading is used by almost every trader, regardless of his experience and level of professionalism. The only thing that changes is the size of the leverage: the bigger your own deposit, the smaller the leverage will be provided in total. And, of course, working with the leverage and their choice is one of the main points when studying market trading.
And once again, let us remind you that the leverage should be used thoughtfully. Only in this case they will serve you well.