How Does Forex Margin work in the United States?0
How Does Forex Margin
work in the United States?
Forex (foreign exchange) is a very dynamic marketplace, and very exciting too with all of the potential offered because of the margin available to trade with. Depending on the brokerage house (each is different in certain ways) they will allow for different amounts of margin on an account. However, recently, in the United States, the Securities and Exchange Commission has enacted new, more restricted, margin requirements. This means that the amount that can be traded on margin, and the amount of leverage that can be used, has been reduced. The goal of these new requirements is to create a safer trading environment for traders so that the total amount of loss will be reduced on each losing trade.
What Is Trading On Margin?
Forex brokers will allow its members to trade on margin, that is to be able to control a large amount of money with a small amount of capital. In a 50 to 1 scenario, you could effectively take and control a trade of $50 with only having $1 in your account. This furthermore means that you could control $50,000 in currency when you only have $1,000 in your account. This way, when there is a move, you are not just trading $1,000, but possibly as much as $50,000.
Therefore, when a trade goes in your favor and goes up 5% the numbers would look like this:
- $1000 trade with 5% return = $50 total positive return = Total Account Size of $1050.
Now if you took that same $1000 and applied margin trading—that is, trading with a leverage of 50 to 1, here is what the new numbers would look like:
- $50,000 trade with same 5% return = $2500 total positive return = Total Account Size of $3500.
These are extreme examples, and no Forex trading system would ever recommend trading your entire account at one time, but this is just for illustration purposes only to demonstrate how much money can be made with the use of leverage. However, the same warning must be applied to the downside… there is the chance to lose just as much as what can be won so using the leverage that is available in the Forex markets can be a dangerous game.
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