Every new trader starts off by hearing some expressions, which he/she doesn’t understand, such as ‘Margin.’ So what is margin? How beneficial is it in trading? What is its role in trading? And, is it preferred by traders, or the Forex company itself?
Let us take some time to answer these pressing, but important questions.
Simply speaking, trading by Margin means that the trader can trade and open deals that need a larger amount of capital than the amount that the trader has deposited in his/her account. The amount you have in your account, is called the margin. The amount remaining in your account after opening the deal, is called the deposited margin.
To explain how we trade by margin and how the trader can benefit from trading by margin, we will provide you with a simple example. Let’s say you need to make a deal of buying on the Euro/Dollar pair, for instance, and you have USD 500 in your account, but in order to be able to close the deal, you have to have USD 5,000. We will lend you the USD 5,000 amount, so you can close the deal and, as a guarantee, we will hold some of your capital. Then after closing the deal, the margin that was put on hold will be refunded to you ,in addition to your profit from the deal. In the case of a loss, the amount that was on hold will be retained from you.
In this example,what you have lost is not the entire deal, i.e. the large amount, but is instead only the amount reserved (kept on hold), and that is what is called the margin.
Margin makes it highly possible for those traders who have small accounts and simple financial capability, to enter the Forex market and trade meaningfully in it. Also, in the case of losing a deal, it won’t be more than a simple proportion of their capital, and that’s because the margin provides them with an opportunity to make a sustainable, yet significant income.
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