A middleman whose job is to execute buys and sells in the market for their clients (traders).They receive a commission/fee for matching buyers and sellers against each other.
An increase to trade with a value far greater than the capital a trader has in their account. If your leverage is 1:50, that means if you have $1000 in your account, you’ll be able to trade as if you had $50,000 in your account ($1000 x $50,000). With greater leverage comes bigger gains AND bigger losses.
When a trade is placed your broker will set aside an amount needed to keep the trade open: this is called a margin. The difference between your equity and margin will be your free margin. If your trades happen to go below your free margin, you will receive a margin call, and can be stopped out of your positions. The balance in your account will be the amount of money set aside by your broker (margin).
BeginnerEarly Stages for Beginners8 Topics
Forex Terminology11 Topics
- Major and Minor Currency Pairs
- Basic Forex Terminology
- Pips & Ticks
- The Broker & The Spread
- What is a Lot?
- Stop Loss & Take Profit
- Margin & Leverage
- Retracement & Reversal
- When Can I Trade Forex? Sessions - Market Open and Close
- 3 Types of Analysis (Technical, Fundamental, Sentiment)
- 3 Ways a Market Can Go (Up, Down, Sideways)
Margin & Leverage2 Topics
IntermediateIdentifying Scams2 Topics
Brokers for Beginners5 Topics
Technical Analysis13 Topics
- Types of Charts
- Understanding Japanese Candlesticks
- Candlestick Patterns For Beginners
- Single, Double & Triple Candlestick Patterns
- Support and Resistance
- Confluences w/ Candlesticks & Support & Resistance
- Counter Trend Trading/ Counter Trend Lines
- Moving Average
- Top-Down Analysis
- Consolidation Trading (Breakout, Retest, Continuation)
AdvancedUsing Indicators6 Topics
Technical Analysis (Part 2)8 Topics
Market Structure5 Topics
Fundamental Analysis9 Topics
CompletionRisk Management for Beginners8 Topics
Psychology for Beginners7 Topics
Personal Psychology Questions2 Topics
How Can I Trade if I Don’t Have Much Money?
Margin & Leverage may be your two best friends for newbie traders in the Forex Market, because mostly 99% of you guys aren’t going to open up a $100,000 trading account, right? So this is where margin and leverage come into play as they come hand in hand.
As we briefly mentioned earlier, Leverage allows you to trade in the market with more than what you physically have in your account. For example, if you had a $2000 trading account and a leverage of 1:5, you can make trades as if you had a $10,000 account! ($2000 x 5)
The highest leverage a regulated broker can offer is 1:100. Meaning with that $2000 account, you can trade big positions, as if you had a $200,000 account! ($2000 x 100).
The highest leverage an unregulated broker can offer is 1:500. Meaning with that $2000 account, you can trade big positions as if you had a $1,000,000 account! ($2000 x 500). That’s crazy!
The unfortunate part about it all, is that new traders ONLY look at the potential profit when it comes to using leverage while trading. Yes, you can make significant gains trading on leverage, but you also can blow your account QUICKLY if you aren’t careful! Trades can go against you REAL quick.
Now margin is a little bit different, even though it goes hand in hand with leverage. Margin is essentially what keeps your account active during a trade. It’s a portion of your capital that you use when entering a trade that is needed to open a position and keep it running.
Your broker sets some money aside (margin) to:
1) keep the current position open and
2) in case you want to open a 2nd or 3rd trade).
Now this number VARIES greatly depending on what broker you’re using and what pair you’re using. You may have a margin requirement of 1%, 2%, 5%, or even 10%. Meaning if you had a $10,000 live account, you opened a position worth $10,000 and the margin requirement was 2%, your broker would hold $200 to maintain that $10,000 position. Once your trade ends, whether you win or lose, that $200 is released back to you.
The reason this happens is because the broker wants to make sure you’re able to cover any future loss!
NOTE: Margin is NOT a down payment. You’re not paying anything. Margin in the stock market is completely different from margin in the Forex Market as you are not physically borrowing any money.
Another thing that can happen that you need to be aware of is your broker closing you out of your trade FOR you. This is known as getting margin called. This means that if your margin falls lower than the minimum requirement required to keep your position open, your broker will close your trade yourself. You don’t even have to close your trade. You’re losing so much money, your broker will pull up like: “AHT AHT!!! You’re done.” Literally just like that.
This will only happen if the equity in your account falls lower than the margin required to open and maintain the position. So back to the $10,000 position & $200 margin requirement (2%) we used above. This does not mean if you lose $200, your broker will close your trade. This means that if your $10,000 is losing a great amount of money ($9,800 worth) and your account falls lower than the $200 requirement, your broker will close your trade. You almost lost 100% of your account… if you weren’t smart enough to stop the bleeding, your broker sure enough is!
NOTE: If that $10,000 account falls to $200 FLAT (the same as your margin requirement), you can’t open any new positions. You won’t get margin called just yet because the numbers are the exact same. The only thing you can do is close the position and eat the $9,800 loss, or pray like you’ve never prayed before in hopes that your trade reverses in your favor. If it falls lower than the required margin, your trade will get margin called.
Understanding how margin & leverage work is vital to your trading career! You need to understand how it works and how it can be beneficial (potentially trading with a higher account and only needing a certain amount of money in order to maintain the position) and also detrimental (too high leverage, letting your trade bleed out before manually closing) to your trading.
NOTE: Yes, you can use a decent stop loss to prevent being margin called. If you place a trade, end up falling asleep, and forget to use a stop loss, and your trade goes all the way against you, you’ll probably experience being margin called. It’s not a good feeling.
Margin called is another way of saying: BLOWING YOUR ACCOUNT.
When someone says they blew their account, they typically got margin called and over-risked their entire account on a trade or two. Don’t be like them.