One of the best advantages of forex trading is the ability to use margin. Every retail forex brokerage out there offers forex trading on margin. Forex Trading on margin allows you to deposit a small amount into your trading account and control a much larger amount in the actual market.
Forex Margin - Simplified
Let's say that you are trading with a broker that allows 100:1 margin, this means that for every $100 in your account, you can trade $10,000 in the market. This is a big advantage because while small fluctuations in the trade value might not seem like much when you are trading dollar for dollar, when you magnify your trade size by 100 times your actual capital, small fluctuations become large changes in your balance.
A $10,000 has an approximate pip value of $1.00 per pip. If your $10,000 trade moved 10 pips, you would have an account gain of $10, or 10 percent.
Forex Margin - The Downside
The downside is that the opposite is also true. If your $10,000 trade went against you by 10 pips, you would instantly lose 10 percent. Even more to the point, a 100 pip move, which is rather common within a day or two, would wipe your entire account balance.
There are plenty of brokers out there that will sell you on the idea that more margin is better, but that is not really true. Forex margin is a double edged sword that can work for you, or kill you. The marketing around forex margin encourages the belief that using margin equals insane profits. While that may be true, the dangers are not nearly discussed enough.
Using forex margin is a big advantage, but you have to know what you're doing, or start very small to learn. Forex is not about instant riches, it's just like any other investment, it takes some thought and care with what you're doing. The ability to trade forex on margin is an advantage, but it needs to be handled carefully.
