Margin trading is one of the important concepts in the world of forex trading, as it is the foundation of the transaction. I have explained this in another article, but then I felt the need to create a separate article that discusses this.
In currency trading, profit is gained from the difference in price of a currency. The difference is generally small and do not give a significant capital gain for a trader. You need large amounts of money to be able to generate substantial capital gains as well.
Margin trading model can overcome this.You do not need to deposit large sums of money. Simply deposit a percentage of the total money required as collateral. This is called margin and the percentage that you deposit is called leverage, which is offered by your brokerage firm.
Each company offers different leverage, there is a 1:100, 1:200 and some even up to 1:500. Again, please note that the "leverage" can indeed maximize your capital gains, but the "leverage" you can also maximize the loss! So, this is a double-edge sword. Beware! For example, in 1:100 leverage, for every dollar that Mr. Jack deposited into the account of broker companies, worth 100 dollars in his transaction.
Difference between spot trading with margin trading is described as below.
Spot Trading:
Mr. Jack bought EUR 100 dollars U.S.. This means that capital gains earned by Mr.. Jack is as follows:Margin Trading:
(1.65 - 1.5) * 100 = 0.15 * 100 = 15 dollars
Mr. Jack bought EUR 100 U.S. dollars through a broker. This broker offers leverage of 1:100. Means that profits earned by Mr.. Jack is as follows:
(1.65 - 1.5) * 100 * 100 = 1500 dollars!
