How Trading Forex on Margin Works

One of the key benefits of trading forex for retail investors is the ability to trade on margin (also known as ‘leveraging’ or ‘gearing’). This means that, for a relatively small initial investment, you have the ability to increase your forex trading position by paying a percentage of the nominal value of the contract. However, margin trading also carries a high degree of risk, as a small market movement can result in a substantial loss of funds.

Given the potentially significant size of a trader’s position, it is important that forex investors understand how forex trading on margin works. Looking at an example, if you have deposited $50,000 in your account and you open two trades: a buy of 1,000,000 EUR/USD and a buy of 1,000,000 AUD/USD, each trade has a margin requirement of $10,000 for a $1,000,000 position. You therefore now have $20,000 in used margin and $30,000 in useable margin. In this scenario, the $30,000 will provide you with a cushion to withstand some market losses and means you will not need to close your trade prematurely.

Should EUR/USD now move up, resulting in a $5,000 profit on that position and $35,000 in usable margin, but AUD/USD fall, resulting in a $35,000 loss, your usable margin would now be zero and each of these open trades will be closed. It is therefore important to consider your position size in relation to your account equity to ensure you do not over leverage, making yourself vulnerable to relatively small adverse market moves.

Although you are able to access leverage on online forex trading platforms , such as dbFX, you should clearly assess the potential risk and reward of an investment opportunity, and from this, establish whether leveraging to enhance potential returns makes sense. Trading on margin is explained by Betsy Waters, dbFX Global Director, in a series of forex trading video interviews. Visit www.dbfx.com for more information.