Trading on the Forex market occurs with margin ie. geared or leveraged transactions. Leverage trading, or trading on margin, means that a trader is not required to put up the full current value of the position he wants to open. But there are some important distinctions between trading stocks on margin and trading Forex on margin.
When stocks trade on margin, the leverage ratios are in the range of 2:1 or 4:1 – meaning a trader would only have to deposit $10,000 to the trader’s account in order to trade stocks worth $20,000 or $40,000 respectively. However, this kind of leverage requires the stock trader to be approved for “credit” for the amount invested that is in excess of what is deposited. Moreover, if the value of the stocks falls to a certain level, a stock trader trading on margin may have to pay additional funds than originally deposited to cover the losses.
Forex trading offers more leverage than stocks or futures - up to 200 or 400 times the value of the deposited funds in the Forex trading account. Therefore, at 400:1 leverage, a trader need only put up $25 to trade $10,000 worth of a currency. However, unlike trading in stocks, Forex traders do not need credit approval to trade on margin. If the value of the Forex positions falls to a certain level, your broker will close out (ie. liquidate) all positions so that the trader will never lose more money than initially deposited in the currency trading account.
Keep in mind: that increased leverage increases both a trader's opportunity and risk. For example, at 400:1 leverage, a change of 1% in the underlying value of the trade will result in a gain or loss of 400% on the underlying deposit. So you have to setup a well defined strategy to take profits and cut losses before entering a transaction.
Regards,
A. Black
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