How Margin Works

When you trade currency on margin you are increasing your buying power. For example, if you have $4,000 cash in a margin account that allows a 100:1 leverage, you could buy up to $400,000 worth of currency. The reason you can do this is because you only have to post 1% of your purchase price as collateral. Therefore you have $400,000 in buying power. With increased buying power you can up your total return on investment with less cash outlay.

Remember though that buying on margin can increase your profits and your losses. Always ensure you totally understand how your margin account works. Read all of the paperwork and agreements from your clearing business and never hesitate to ask questions. If the available margin in your account falls below a predetermined threshold, the positions in your account could be totally or partially liquidated. You might not get a margin call before your positions are liquidated. Make sure you are always on top of your margin balance and use stop/loss orders on every open position to limit your downside risk.