For experienced forex traders, they use margin trading to gain profits. Even for some traders with experience, the idea of a margin might be challenging if they did not study it well. So, we can only imagine how hard it is for a novice trader to understand, let alone use it in the live forex market.
What is margin trading?
Many people are not aware of how a margin trade works. If they even do, they sometimes get confused. People who trade on margin want to enter prominent positions for whatever reason. However, the problem is, they do not have enough money. Their account balance is less than the position that they want to enter. Margin trading comes to the rescue. Thinking about profiting even when you have a tight budget may sound too good to be true, but it is possible.
The risks of margin trading
While it is true that you can take home a sum of money with a tight budget, it is also true that you can go home with a much more significant loss if you bet on the wrong side of price movement. A trader realizes profit once the price goes in the direction he is betting. On the other hand, the trader realizes massive loss if odds do not go in his favor — especially if he went huge. If you are a new trader, we suggest you gain more experience and knowledge before betting your money on margin trading.
A sample scenario with a margin trade
Janice placed traded on margin. Suddenly, her trade closed, and she saw that she have significant losses instead of a profit. Janice called her forex broker and asked what happened because she was so clueless about why she ended up with such a loss. She cannot even afford to trade again as she does not have enough money anymore. This situation showcases a margin call and a stop-out.
Margin trading terms
If you are still learning about the forex market and looking for ways to earn profit with a tight budget, you must know that there are many terms involving margin trading. Some of these are used margin, free margin, margin level, margin call, margin closeout, stop out, and many more. These are essential not to wonder why your account would suddenly close ad end up in massive losses.
If you go and check a margin trading platform, you will see many displays that we call metrics. These metrics are measurements, and they are all connected as one change in one metric causes a change in another. The layout might not be the same for every platform. One metric may have a different name in another platform, but they are essentially the same. It is a trader’s job to understand how they work together if profit is the aim. You will meet all of these metrics when you decide to trade on margin: balance, used margin, free margin, unrealized P/L, equity, and margin level.
Repeat with me
I will not trade on margin unless I fully understand how forex trading accounts work, let alone margin trading!