Margin is the amount of deposit traders need in order to enjoy leverage and higher potential for gains. It is also used as collateral to ensure traders have the ability to cover any losses that might incur on his or her positions.
How Does It Work?
If a Forex broker offers a margin rate of 2% and a trader wants to open a position worth $10,000. Only $200 is required as a deposit to enter the trade. The remaining 98% will be provided by the broker.
Even though trading on margin magnifies the gains, it also has the power to bring larger losses. Just like leverage, it can also be a double-edged sword that increases traders’ risk at the same time.
To sum up, having a great understanding of margin trading can surely benefit traders. Traders only need a small amount of capital to open a larger position. Always monitor your margin level on a regular basis, using stop-loss orders on each trade to manage losses and keep your account adequately funded.