What is margin trading?
You may notice the phrase "margin trading" quite often in the financial
world. It comes from the word margin – the pledge, which trader
provides to the broker for the financial operation. Margin could be
different, depending on the type of the asset and the broker's
conditions. For example, for some liquid assets margin may be only 1 -
2%. This means, that in order to purchase this asset you ought to
provide only 1 - 2% from its value, and the rest of the funds will be
added by the broker.
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There is another phrase that is closely related to the margin trading –
the leverage. Leverage is the instrument that allows you trade with the
sums that exceed your funds considerably. Usually, the size of the
leverage is 1:100 - 1:2000, depends on the type of the chosen account in
our company. You can learn more details in the page "Trading Terms".
Each dollar that you deposit, JustForex will multiply in 100 - 2000
times, thereby increasing the price and the potential of your
operations.
For example, to buy 1 lot of USD/CHF, trader needs the sum of 100 000
USD. Not many beginners can afford for themselves such starting capital.
So this is when leverage can save the situation. Let’s imagine that
the trade has chosen Classic trading account with the leverage 1:1000.
It turns out that minimal sum to buy 1 lot is 100 000/1000=100 USD. You
need only 100 USD to buy 1 lot of USD/CHF.
If the trader enters into the buy order with 1 lot and at a price 1.3600
and closes it at a price 1.3610, this means that his earnings is 10
points or 100 USD.* This means that the trade has increased his capital
on 100% and now it is 200 USD.
In case there is no leverage, trader needs to have 1000 USD to open the
order of 0.01 lots. Wherein, the earnings with the same circumstances
will only be 10%.
Trader from the beginning adjusts his trading strategy specifically for
the chosen conditions, which allows to use leverage with benefit and to
increase potential earnings.
This is a great solution for the traders with small initial investments,
and in case of the favorable conditions will allow him to increase the
capital faster.
* You should take into consideration the size of the spread at the moment.