The forex market (widely known as FX) is the biggest and most liquid financial market in the world, with a daily estimated volume exceeding $5 trillion. Most of the retail traders start their online venture in the spot forex market, which is about $1.5 trillion in size.
Given that liquidity is so abundant in forex, volatility is inversely correlated and thus is very low. Due to very low volatility, margin trading is used by most of the easyMarkets, XM, and forex.com traders.
What is margin trading?
With margin trading, a retail trader can trade assets using funds provided by a third party (usually an investment broker), allowing the access to greater sums of capital and thus leverage trading positions. Essentially, when you are trading on margin, you are borrowing funds from your broker in order to enter the market with a bigger volume.
Before you are spooked out believing that you’ll be tied to credit for years, things are different in forex trading and the cost of margin trading is way much smaller, as compared to traditional credit.
What is the leverage?
On the other hand, leverage is the ratio of a trader’s funds to the size of the broker’s credit. To give you a specific example, a 1:100 leverage on a trading account means that the trader must deposit only 1% of the value of a given trading position and the remaining required liquidity will be provided by the broker.
Implications of using leverage
The main advantage of using leverage is that it could amplify profits, but it also can do the same with losses. For the example we emphasized above, if you open a position with 1% of your money and 99% from the broker, it will be enough for the market to move against you by 0.7% before a stop out will be initiated. Even though the broker borrows you money, only your deposits are at risk.
Because forex trading involved taking risks, the professional use of leverage involves you having a risk management strategy. As a result, you must stop thinking that you’ll be able to trade professionally with as little as 10$. You’ll need to allocate more capital and open positions in such a way that there won’t be any trade which will put all your money at risk. Using leverage in a responsible way will mean you are one step ahead of other beginners and the chances of you losing all your money are thus reduced