Why Is That Trading Forex On Margin Is Risky?
October 7, 2009 by admin
Filed under Forex General
Why Is That Trading Forex On Margin Is Risky?
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When trading in the forex world, you will encounter a lot of risks. With your money at stake here, you should be able to find a way on how to reduce your losses so that you can experience a continuous flow of cash in your bank account. Brokers actually allow traders to make a transaction on margin. This is an act that enables a trader to extend the credit for trade dealings. An example here is when one is going to trade on a fifty to one margin. Here, every one dollar on the account will let the individual to trade for fifty dollars. It may sound very easy and almost attractive. However, even though this can be advantageous, there are certain risks or disadvantages that one will encounter when performing margin trading.
First of all, what are the advantages? One of these is the fact that margin trading allows the trader to high percentage of profits when compared to the account balance of the trader. For instance, one has 1000 dollars of account balance. When you will not trade on margin, you will open a trade of the same amount that will garner 100 pips. For every pip, this is worth 10 cents. The percentage here is 1% gain or ten dollars for trade. On the other hand, if you will perform a transaction with the same amount and margin, you can get as much as 50,000 dollars trade value. For 100 pips, you will obtain 50% gain or 500 dollars. It is clear that you get more at margin trading.
Now, let us go to the not so good news. When you trade forex on margin, you will face risks. This trading strategy is actually associated with risk all the time and this is why many are afraid to try this even when it offers great profits. Let us have an example by using the same account balance. When you drop 100 pips, your total loss will only amount of ten dollars if you do not trade on margin. That sounds okay since you will still have tons of capital left that allows you to try again. However, when you trade on margin, you will lose 500 dollars in 100 pips. That is half of your account balance. One more trade in that fashion will mean your account is over.
Without going through margin trading, you can perform several trades and even when you lose, there will still be more left. Meanwhile, if you succeed, you have the chance to gain a lot from your transaction. Margin trading can be your effective tool to gain impressive profits yet you will risk excessive money loss. You can avoid this by not being too greedy and only do this with a reasonable amount. In addition, you must have a firm risk management guideline for margin trading and your earnings.
See this video about how trading on margin works: