Margin trading – speculative operation, with borrowed capital, secured by a smaller amount – margin. Such trade on the stock exchanges are often called trading "shoulder". Thus, the trader at the conclusion of a margin transaction, pay a Deposit of "margin". The broker provides the capital required to open a position, but on such terms that the speculator will not be able to lose the borrowed funds, and risk only their Deposit. If the deal is unprofitable, it will be closed as soon as the amount of the loss approaches the value of the collateral capital.
Specifics of margin trading
1. When the trader's need for borrowed funds to work
2. "Leverage" is used for speculative activities
3. Margin trading is only possible when working through a broker or dealing center
Due to the fact that Forex broker give their clients considerable leverage, then there is no need to put on account of the large sums of money to make trades. If about 10 years ago, the leverage of 1:100 seemed to be very large, especially for margin trading on the stock market, at the moment there are 1:1000 and more.
Benefits of margin trading
Currency pairs typically changes the value in narrow ranges during the day. There are no significant changes in courses, as, for example, in the stock market. Only in times of financial crisis, serious problems in the economic sphere can be changes in rates of exchange pairs to 5-8%.
Average values of changes in market courses typically do not reach and 1%. For example, having the trading account a certain capital, the trader can acquire a monetary instrument in the amount of 1000 times more of their funds when working with a leverage of 1:1000.
Speculative Forex trading is almost impossible if you only work your capital. Too small in percentage terms the movements of the tools to generate meaningful profits. Even considering the lowest possible volume that you can buy and sell on the market, a trader without leverage it took considerable resources. But, thanks to the shoulder, the speculator can begin his work on the market, with only a few dollars on Deposit.
How to get extra capital in Forex?
To get the opportunity to work with the leverage, one does not need to issue securities at a Bank to open a credit line and so on. In the framework of the trading on Forex speculator, it is sufficient to conclude a contract with DC, which will operate a currency speculator. After a single filling in all the necessary paperwork, a person can use the leverage at any point in time, doing as many transactions as deemed necessary.
A trader can choose the maximum amount of leverage for their work within the framework provided by the broker possibilities. At the conclusion of the transaction at the speculator fixed mortgage part that will be larger, the larger the leverage value was chosen. Thus, one gets the opportunity to work with significant funds using the minimum of your capital.
For example, we take leverage 1:100. Trader funded your Deposit of 150 USD. If he uses a shoulder to the max, you'll be able to by: USD 150 * 100 = 15000 USD. Thus, earning in a single operation, for example, only 0.3%, the speculator will make a profit of 45 USD. If people would not use borrowed funds, then its income amounted to only 0.45 USD.
On the other hand, the greater the value of leverage we choose for our work, the greater become the risks. To open the transaction using all his capital as collateral, then choose a sufficiently high level of risk. Even a small price movement against the position of the speculator may result in the loss of the entire account.
Buying and selling on margin
When it comes to the purchase of an instrument on margin, necessarily implied further selling just purchased. After all, in order to give a loan capital, a person must close the deal, sell all that he purchased. It is desirable that at the time of sale of the instrument, its market value would be higher than at the time of purchase.
Exactly the same situation in the case if the trader is initially a certain amount of trading instrument, sells it, and after that, when the price of the instrument falls, then buys and returns it. Once opened, the speculator formally have to return the funds that he used for the opening operation. Closure allows you to repay the borrowed capital and the financial result.
What DTS provides to its clients the opportunity to work with leverage? First, most speculators would be unable to perform transactions because they do not have sufficient own funds for acquisition of the trading instrument. Secondly, margin trading as well often is a competitive advantage.
A lot of traders pay attention to what kind of companies can allow them to work with very large values of the shoulder. Third, the broker receives an additional profit for lending the speculator. The so-called swap and there is a fee for the use of borrowed funds. Another advantage for DC is the increasing volume of transactions of a trader when a significant amount of shoulder.
Risks of margin trading
Margin call (margin requirement) is the level agreed in advance with the part of DC at which the market price, all open trades are closed. For example, a company can determine the level of margin call is equal to 30% of the Deposit. Thus, if the collateral positions was $ 150 USD, the transaction will be closed by the company as soon as funds will be less than 45 USD.
A margin call occurs, as a rule, at unsuccessful coincidence of circumstances in the trade, when a trader used a lot in the work. To avoid such situations, the person will need to learn the rational use of capital. Usually a margin call to the trader shows his inconsistency in trading at the moment.
Of course, the risks of margin trading higher than the risks of working only with their capital. At the same time, the traders that take advantage of margin trading, can earn significantly more than their colleagues who do not resort to the use of leverage.
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