Forex Trading Margin
One of the most often advertised advantages of the Forex brokers is the use of trading on margin. Not just that’s cute margin, but oh my god bet the farm rag to riches (or riches to rags) margin. Some of them advertise as much as 200 to 1 margin to trade on the Forex. Let’s put this in perspective.
You have $1000 to trade with and you don’t want to tie up more than 10% of your money in any given trade leaving you $100. You believe there’s strong support 1% below the current price of your forex pair with the first real resistance above the current price by 3%. That means if you’re wrong you lose .1% of your total account value, but if you’re right you gain 0.3%. That’s a good risk to reward ratio, however if you can only find one or two trades like this a week it’s going to take a long time to make some money.
This is where leverage comes in. Instead you tie up your $100 by buying $20,000 of your currency of choice. If it falls 1% you’re out 20% of your portfolio, but if you’re right you are up 60% in one trade! Can you stomach this volatility? If you want to trade on margin your need to find high risk to reward ratio trades and really stick to your trading plan because the action is fast and wrong decisions will wipe you out.
I don’t believe the forex trading margin is good for the beginner, but it’s important to understand because it may fit into your overall plan after you’ve taken your punches for awhile in the mini accounts. The important part to learn is your money management. If you settle on a trading strategy that has an 75% win rate still means you lose 25 out of every 100. How would your account feel if you lost 20 trades in a row on your way to winning the 80. If you’re leveraged heavily you may likely be out of the game long before your winning side comes back. Remember a 50% draw down on your account requires a 100% gain to get back to break even. It’s a lot to digest, take it slow.
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Thanks for the article. I have heard a lot on Forex before but you are really giving away great info here.
I used to trade for a living but lost a fortune. I am now trying to learn my trade before i dive back in and just wanted to say that i think you have some good stuff here.