If you are interested in Forex trading, it is important to learn the basics online before continuing. Jumping right in is not considered a good idea because there are many different aspects that are similar to regular trading, but not quite the same. Going into a Forex market with regular market knowledge could put you at a disadvantage.
Margin Calls and Risks
If you are not careful, you can lose money by trading with Forex. Margin call is when your money falls below the available amount and in this case, the Forex broker could close your positions so that the account doesn’t fall into a negative balance. This means that you cannot lose more than you deposit.
In order to learn the forex trading basics online, you must remember that you shouldn’t receive a margin call by monitoring your own balance regularly. Trading tools are available online through your Forex broker’s website to help prevent a margin call.
Margin and Leverage
Now that you understand the margin, it is important to learn about leverage. A broker provides you a sort of loan, called leverage, based on the amount that you have put into the account. Leverage options include ratios of 50:1, 200:1 or 100:1, depending on the size of position and broker. Standard lots usually have a 50:1 or 100:1 ratio, while mini-lots offer a 200:1 ratio.
Margins come into play by using or not using them. If you use the margin and leverage allotted, you have a higher purchase power but if you do not use the margin, you can only have the buying power of what you put in.
For example, if you use margin and leverage with $1,000 in your account and a 100:1 ratio leverage, you have a purchase power of $100,000. Without margin and the same amount and ratio, you only have $1,000 purchase power.
Forex trading online is similar to buying in bulk. You cannot purchase a single egg or a single potato chip. You are required to purchase an entire bag or carton. While you may want to buy a quantity of something, you must do so in lots. You have two lot options, mini and standard lots. While each will cost what it costs, you can purchase as many lots as you want. If the standard lot for a Forex broker is $100,000, you will buy one lot. If you purchased three lots at that price, you would purchase $300,000.
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