Concept day! This is actually a pretty important thing to know, regardless of which market you’re trading.
Any time you open a position larger than you can own with your own capital, you are margin trading. A broker allows you to trade more based on what leverage you set up, or that they offer. Free money? To trade this way, you have to have some sort of compensation available should your trade go bad, and this is the margin. Leverage is kind of like the compliment to margin. A 10% margin requirement is the same as a 10:1 leverage; a 5% margin requirement is the same as a 20:1 leverage (margin requirement % = 1/leverage number) This is just a safety line to know how much you can risk on a position.
Having a 10:1 leverage would mean that if I had 1,000 dollars, I could trade a position up to 10,000 (or in terms of margin, to trade a position size of 10,000 I would have to have 10%, or 1,000 dollars of margin. See why I said it was the like the compliment?).
So what’s the catch?
Example. I’m trading with 1,000 with a 10:1 leverage
I buy 10,000 units of a currency that’s at 1.0000. It goes up 2 cent (100 pips) to 1.0200. I sell, making a profit of (10000*.02=)200. Clean. Easy. Now considering how much money I REALLY have, I’m making 200 with 1,000 which is a 20% gain.
-In reverse, if the currency drops 2 cents, I’m nowlosing20%. That’sa lot.
Well if you’re going to be on this crazy +/- 20%, why trade with margin? Isn’t it safer just to trade without it to save yourself from getting wiped out? The reason why it’s used so much is because in an average position taken, the risk/reward isn’t 1:1. To tie it in with the TT system, if I stand to win 50 or 75 pips a trade, and only lose 25 max, then it pays off in the long run to be using margin.
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