Margin trading on the Forex market

Margin trading  is a trading with borrowed funds. The idea of such a trading is to borrow money from a broker and trade with funds greatly exceeding trader’s own. This pledge is called margin. Margin funds are measured by the currency of deposit (for instance, US dollar).  Margin depends on liquidity of a trading instrument (products).

The essential part of the margin trading mechanism is to provide a leverage.

To calculate margin-based leverage, divide the  margin amount by the total value of a transaction. For example, the ratio 1:100 shows that in order you can trade, the balance of your trading account have to be 100 times less than the value of a transaction. A margin credit provides a rather higher leverage if you compare it to a credit and the amount of loan greatly exceeds the amount of deposit. It allows you to trade in large volume that also raises risks of loss. The increased volume requires larger margin and the risk level grows also.

 

To calculate margin level, divide trader's equity by the margin and multiply it by 100 percent. Every broker company defines the minimum margin level on its own. If your equity becomes less than used margin, you will receive a Margin Call.

A broker company is also called a liquidity provider, because it provides trading on the Forex market.  Much as a broker is a liquidity provider for people who have a trading account, banks are liquidity providers for a broker. Usually the bigger a liquidity provider is, the larger deposit is required. So to get access to a high level liquidity provider directly is difficult for average traders and they use broker companies.

The margin trading mechanism allows trading on the forex currency market which includes plenty of banks, hedge funds, market makers etc. Credit funds provided by a broker are the part of the contract expressed in money terms (or other assets). A trader pays for this contract through transactions on the Forex, futures, stock and options markets.

Terms of a margin credit:

• It doesn’t require any additional agreement;
• Margin may be given in money funds or in other type of assets that company has on its account;
• Margin is free of charge within one trading session;
• Further, a company generally charge a fee (swap).