Forex glossary of terms
Forex margin trading
Margin for stocks and forex are not the same, as Noble Drakoln will agree. In his book 'Winning the Trading Game: Why 95% of Traders Lose and What You Must Do to Win', Drakoln said, "the only thing the work margin for stocks and margin for futures and forex have in common is the spelling." He proceed to stress that while margin for stocks work like a downpayment for asset ownership, margin for forex is actually 'a promise to pay'.
With forex margin trading, one can trade up to 500 times the balance of one's account. For example, if you have $500 in you your account, you can trade $250,000 worth of currencies. For forex investors, this facility can be a two-edged sword. Although one can stand to gain big time from leveraging minimal capital, one can also lose more than one's initial investment, or even more than one can afford.
Drakoln offer his insight regarding forex margin trading, "Once the everyday investors changes his attitude and begins to really respect leverage and learn how to incorporate it into his trading...an entireli different approach to trading evolves." He also said that investors should not fear margin, but respect it as a potent tool in wealth building.
Another author, John L. Person said in his book 'Candlestick and Pivot Point Trading Triggers' that, "while it contributes to the risk of a given position, leverage is necessary in the forex market because the average daily move of a major currency is about 1 percent, while a stock typically sees much more substantial moves."
This is why traders are given the typical margin of 100 times. When you do the maths, with this forex margin trading, traders control the leveraged sum while owning only 1% of it to benefit even from tiny forex movements. The rest of the 99% is a loan from the broker at no interest rate, provided the investor close his position before a stipulated delivery date. If the delivery date are not met, the loan gets rolled over and interest will be charged.
The high risk of using a maximum margin can be neutralized by using a stop-loss order, which is a pre-determined exit point chosen by you. Say for example you enter the market with $150,000 at the buying price of 1.1885 expecting the USD/EUR to soar but instead of going up, the market crashed. If you have placed a stop-loss order upon your purchase, say, at the price of 1.1850, your loss will be minimal as you are guaranteed to exit at that price point. Even if the market were to crash to 1.050, you have taken the necessary precaution to limit your risk.
In a nutshell, with the right attitude, knowledge and technique, the downside of forex margin trading can be controlled while it's earning capacity can be unlimited. This is why forex is a lucrative market that is fast gaining popularity among smart investors.
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