Trading
on margin
When
you trade on margin you don't trade with the money in your account,
rather you are trading with money that you borrow from your broker.
Your account then acts like a deposit to secure the trade and the
amount the trade either gains or loses is either added to or subtract
from your account balance.
What
if a trader places account a portion of their account is placed on
hold for each lot of currency that they trading with. Let's say a
trader has an account balance of $10,000 and decides to buy one
mini-lot of currency, $50 of his account is then placed on hold and
that is what's known as it's used margin he still has $9,950
available for him to trade.
Account Balance
|
$10,000
|
Used Margin
|
$50
|
Usable Margin
|
$9950
|
Now
let's say he increases that position size to 2 mini lots he is now
has a position size of $20,000 worth of currency is used $100 worth
of his margin. He still has $9,900 he can trade with. Let's say he
has now buy 20 mini lots, he has now obtain $200,000 with the
currency to trade with. $1,000 of his account is placed on hold and
that is his used margin and he still has $9,000 he can trade with.
So
as you can see leverage and margin allows you to take position size
that is much larger than anyone should possibly take. Margin and
leverage is a system that allows trader to borrow money from the
broker and trade in position size that is much larger than their
account balance to amplify for trade.
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