The concept of margin in Forex

There is a notion that Forex traders should be well aware of: it is the margin. This is an amount made available to an online broker each time the client places an order. This amount constitutes as a guarantee on the money lent by the broker

Thanks to this margin, the trader has the possibility to benefit from the leverage effect and multiply the investment without having to pay more money.

Benefits of margin

The existence of the margin is very advantageous for the trader. Even without significant sums of money, the latter can greatly increase its investment capacity. The amount of leverage varies depending on the online broker, but it can be as high as 400:1. For example, with a leverage effect of 100:1, with a capital of only 100 euros, the trader can invest 10,000 euros. Note that the higher the leverage, the higher the risk.

It should be stressed that leverage must be used sparingly or risk losing a lot of money and ending up with a negative balance. To take advantage of this option, it is essential to adopt a good capital and risk management strategy (money management and risk management).

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Take precautions

Even though margin is a concept that seems very attractive, every trader should exercise caution when speculating on Forex. Moreover, even if an online broker offers very high leverage effects, you should not let yourself be seduced too easily. It is strongly recommended to opt for a reasonable leverage effect. In this way, the risks are moderate and it will be more comfortable to deal with unpredictable situations. In addition, capital will last longer when losses occur in succession.

People starting out in Forex should not exceed a leverage of 50:1. And it is advisable to opt for the minimum size batch to get started. In addition, it should be pointed out that even experienced traders do not risk trading with amounts too high (tens of thousands of euros). The most reasonable ones are launched with an investment of up to three or four figures.

In any case, one thing to keep in mind is that leverage only works in traders’ favour when trends are favourable to them. Choosing the highest leverage is no guarantee of earning the maximum amount of money except in the case of making the right decisions (which is not 100% guaranteed, especially for beginners). Caution is always advised. For more information you can consult our new Forex special report