{"id":292474,"date":"2014-08-08T03:59:25","date_gmt":"2014-08-07T17:59:25","guid":{"rendered":"https:\/\/www.gomarketingteam.com\/articles\/every-trader-understand-margin-forex\/"},"modified":"2021-02-19T12:26:12","modified_gmt":"2021-02-19T01:26:12","slug":"every-trader-understand-margin-forex","status":"publish","type":"post","link":"https:\/\/www.gomarkets.com\/en\/articles\/forex-trading\/every-trader-understand-margin-forex\/","title":{"rendered":"What Every Trader Should Understand About Margin Forex"},"content":{"rendered":"

There is no disputing that trading leveraged products such as Margin Forex can be an effective and simple way of gaining exposure to your desired currency pair. However it\u2019s imperative that every trader develop a deep understanding of what it means to trade with leverage before putting their hard-earned cash on the line! Let\u2019s start by exploring the basics of what it means to trade with leverage.
\nSometimes referred to as \u201cgearing\u201d, leverage is the ability to control an asset with only a portion of its value. In the case of Forex trading, sometimes that can be as 500 times your initial capital outlay!
\nLeverage has been used by institutions for many years but has only been made widely available to retail traders with the introduction of Contracts for Difference and Spread Betting in the late 1990\u2019s. Whatever the way you spin it, its clear leverage can work both for and against traders and experience shows in some cases a misunderstood concept.
\nLet\u2019s use the Aussie dollar (AUD\/USD) pair to illustrate how leverage works. A trader wishes to buy A$10,000 in anticipation of it increasing against the US dollar. Clearly if you were to go to your local money exchange, you\u2019d need to stump up A$10,000 and you\u2019d be handed back around US$9,200 at current rates. However trading with a forex broker, you only require a fraction of the total value to get the same A$10,000 exposure. Some foreign exchange brokers will offer up to 500:1 leverage<\/a>, meaning that only 1\/500 (0.2%) of the contract needs to paid up front, therefore enabling a trader to open a position to the sum of A$10,000 for an initial outlay (\u201cmargin\u201d) of $200. For the trader to double (or lose) their entire initial outlay of $200, the currency pair would only have to move by 0.2% due to the amount of leverage used (0.002 x 500). Whilst this may present a lucrative opportunity to trade in sizable volume, it can work in both directions and requires careful risk assessment by the trader.
\nWhen capital is borrowed interest comes into the picture, and it\u2019s no different in the Forex world. When trading FX, the interest component is known as a \u201cswap<\/a>\u201d which is paid or received depending on the currencies you are buying and selling.
\nMost transactions in the forex market are conducted using leverage in some way, shape or form. Many would argue that without the use of leverage success in currency trading would be difficult to achieve, solely relying on capital gains and interest rate differentials at the mercy of economics. On the other hand, many that trade using leverage ignore the scale to which they are trading and are subsequently backed into corners by only small fluctuations in prices. Consequently, an understanding of leverage is crucial to your trading success.
\nTom Williams
\nCurrency Analyst<\/strong>
\nFollow me on Twitter<\/a><\/p>\n

For more resource on Forex trading check out our Forex Trading For Beginners<\/a> introduction, Forex Trading Courses<\/a>, open a Forex Demo Account<\/a> or open a live Forex Trading Account<\/a>. See here for more information on leverage in Forex trading<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

There is no disputing that trading leveraged products such as Margin Forex can be an effective and simple way of gaining exposure to your desired currency pair. However it\u2019s imperative that every trader develop a deep understanding of what it means to trade with leverage before putting their hard-earned cash on the line! Let\u2019s start […]<\/p>\n","protected":false},"author":14,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[2871],"tags":[],"yoast_head":"\nWhat Every Trader Should Understand About Margin Forex - GO Markets<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.gomarkets.com\/en\/articles\/forex-trading\/every-trader-understand-margin-forex\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"What Every Trader Should Understand About Margin Forex - GO Markets\" \/>\n<meta property=\"og:description\" content=\"There is no disputing that trading leveraged products such as Margin Forex can be an effective and simple way of gaining exposure to your desired currency pair. 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