Forex margin trading, also known as leverage trading, is a method of buying and selling currencies on the foreign exchange market using borrowed funds from your broker. In simple terms, it allows you to control larger positions in the market with a smaller amount of initial capital.
Here's how it works: let's say you have £1,000 in your trading account and you want to trade the EUR/USD currency pair. With margin trading, your broker may offer you leverage of 100:1, meaning that for every £ in your account, you can control £100 worth of currencies.
This means that instead of being limited to only buying or selling £1,000 worth of Euros with your own money, you can now enter positions equivalent to £100,000.
One key concept in margin trading is the concept of margin itself. Margin refers to the portion of your own funds that are required by the broker as collateral to support trades. It acts as a security deposit against any potential losses incurred during trading and reduces your "useable margin".
Brokers will have a minimum margin requirement that needs to be maintained at all times. Should the level of useable margin fall below that required, the
broker can issue a margin call and close all open trades to limit exposure.
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