Margin Trading and Trading Volumes
Margin trading (or "buying on margin", or "trading on margin") is the way of trading, relying on the opportunities of using the money borrowed from the broker. Essential advantages that serve as a guarantee for the loan are called “margin”. Margin ensures that the borrowed capital will stay intact, even if the market moves against the position opened by the order. This makes margin lending different from other types of loan.
While opening a trade the necessary deposit margin is reserved on the account and the rest of the finances are allocated by the broker. After the trades’ liquidation, the allocated funds go back to the broker, and the guarantee, along with the profit on the trade, is returned to the trader’s account.
In the Forex market, currencies are usually traded in “lots”, with a standard lot being $100,000. The term “lot” refers to the minimum amount of currency that must be bought. To achieve this amount of currency, brokers offer margin trading option. This means that through your margin account, you can execute deals with a small amount of initial capital. You can open $100,000 or $10,000 positions with as little as $50 or $1,000. In Forex, trading small amounts makes no sense since profits can only be made through large amounts of currency.
Key Features of Margin Trading:
- Margin Trading is of a speculative nature
- It is exercised with a broker as a middleman
- Involves execution of opposite trading transactions; buying is always followed by selling of the same amount of the same currency and selling is always followed by buying
- Is realized with using leverage
Trading on margin does not require significant financial investment, but requires greater attention from trader. Margin availability increases the purchasing power of the trader and allows him to keep open positions, the amount of which far exceeds the funds available on his account.
Benefits of margin trading are obvious - with an insignificant amount at its disposal, the trader is able to handle large funds and improve the efficiency of trading. Even if you have only a few hundred dollars in your pocket, using margin trading you can increase earnings to tens of thousands of dollars. Of course, if your trading strategy is successful.