Forex Margin

A means of leveraging investments in Forex trading is to use a Forex margin account. A Forex margin account is money borrowed from the broker with which the Forex trader buys and sells foreign currencies. The trader pays interest on the loan. If his trading in foreign currency is successful he gains his profit with little investment, only his own initial investment and the interest on the money that he borrows. If his trading is unsuccessful he can magnify his losses when seen as a percentage of his investment. The Forex margin offered by the broker may vary but a Forex margin of 1% is not uncommon. In this case for every dollar that the Forex trader invests the broker provides up to ninety-nine dollars to trade with. As the movement of currency values can be very small the use of a Forex margin allows traders to amplify trading results. This practice can be very profitable and can be disastrous to someone who does not exit a bad trade in time.

When a trader uses a Forex margin account and has a serious of losing trades he may exhaust his own investment and receive a margin call. In this case he has a short time in which to replenish his account or the broker will execute trades to exit existing positions to recoup any losses that the broker has incurred. The trader still owes the broker whatever losses the broker has incurred in closing the trade as well as interest on borrowed monies.

To set up a Forex margin account the trader deposits money for trading. The trader and broker will enter into an agreement as to what the Forex margin will be. Interest is charged only on monies used to trade as the trader does not borrow before trading. A Forex margin account is similar to one used to trade stocks. It is an excellent means of leveraging a small amount of capital into large gains. It is also a means of losing investment capital if the trader does not trade according to a well developed Forex strategy.

Forex margin accounts have come under criticism in the last couple of years after the 2008 stock market crash. This criticism has not had to do specifically with Forex but the fact that there have been so many leveraged investment vehicles, the declines of which helped bring about the 2008 crash. Thus some of the more extreme allowable margins have been cut back in markets such as Tokyo in order to protect and preserve a more orderly and safe market for trading foreign currencies.

Not all broker issue margin calls when a trader exhausts his own capital. It is not uncommon for a trading contract with a broker to specify that in the case of a customer account being exhausted that the broker will automatically liquidate all open positions. There is typically a method of closing positions that will be spelled out in the customer – broker contract. The obvious goal of trading Forex is not to lose money or have a margin account liquidated. Thus traders trade with stops to avoid substantial losses. They work with a trading strategy which they update as necessary to maximize gains and minimize losses.