WHAT IS THE MARGIN TRADING?
You may quite often see the phrase “margin trading” in the world of finance. This comes from the margins of the promises, which traders provide to brokers for financial operations. Margins can vary depending on the type of asset and condition of the broker. For example, the margin for some liquid assets may only be 1-3%. This means that to buy these assets you must provide only 1-3% of the value, and the rest of the funds will be added by the broker.
There is another phrase that is closely related to margin trading – leverage. Leverage is an instrument that allows you to trade with amounts that exceed your funds. Usually, the size of the leverage is 1: 100-1: 2000, depending on the type of account chosen in each brokerage company. You can learn more on the “Trading Terms” page. Every dollar you deposit will multiply 100-2000 times, increasing the price and potential of your operation.
Leverage is an instrument that allows you to trade with amounts that exceed your funds.
For example, to buy 1 lot of USD / JPY, the trader needs 100,000 USD. Not many beginners can afford it for themselves like initial capital. So this is when leverage can save the situation. Let’s imagine that trading has chosen a Classic trading account with 1: 1000 leverage. It turns out that the minimum amount to buy 1 lot is 100,000 / 1000 = 100 USD. You only need 100 USD to buy 1 lot of USD / JPY.
If the trader enters into a buy order with 1 lot and at the price of 1.3600 and closes it at the price of 1.3610, this means that his income is 10 points or 100 USD *. This means that trading has increased its capital to 100% and now 200 USD.
In this case there is no leverage, traders need to have 1000 USD to open an order of 0.01 lot. Where, income with the same condition will only be 10%.
The trader from the beginning adjusts his trading strategy specifically for the selected conditions, which makes it possible to use leverage with benefits and increase revenue potential.
* You must consider the size of the spread at that time.