Margin trading in Forex trading provides traders with leverage. This enables them to open trades with smaller initial deposits while increasing exposure. Unfortunately, margin trading also increases risk and losses; therefore it is essential that individuals understand how best to use it responsibly.
To trade foreign exchange (Forex), or Forex pairs, requires depositing a margin into your broker account – also known as Required Margin – at an agreed upon percentage of full value of trades; this amount varies based on currency pair, broker, size of trades made and whether leverage is being utilized.
Some traders opt not to use margin and instead prefer investing their funds in fixed-spread or low-pip spread trades instead. Although this approach offers plenty of advantages, it may not suit everyone; traders who utilize margin will find their profit potential is greater, yet should remain aware of all associated risks.
Brokers typically issue margin calls to traders using margin, should their margin level fall below the required minimum amount. This could happen if a trade closes with a loss, or the market moves against their position, so when your margin level falls too low a margin call acts as a warning that additional funds must be deposited into your account immediately to stop further losses that could potentially lead to liquidation of margin.
Margin calls can be intimidating, yet understanding their function is key for new traders. Simply put, margin is defined as a percentage of total asset value.
Your broker requires that you deposit collateral with them as collateral before opening a position; this deposit margin (sometimes referred to as an initial margin or deposit margin ) needs to be up front as soon as you enter a trade, with further deposits needed in order to maintain any open positions.
Brokers require significant margin deposits to ensure you can afford any losses on open positions that might occur in volatile markets or prior to economic data releases, which often cause greater market fluctuations.
Failing to pay attention when trading on margin can quickly result in more losses than your initial deposit – an expensive mistake for which most traders take precautionary steps in order to familiarise themselves with margin levels and margin calls.