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Margins in Forex Trading - Importance of Margins for Profit

Jul 24, 2008
Trading in the Forex market is done with "lots" and "mini-lots" of currency pairs. These lots and mini-lots are leveraged money, which is what allows you the potential to make so much profit from trading currency in the Forex. The standard size for a lot is $100,000 in currency, while a mini-lot usually represents $10,000 in currency. What leverage allows, is that you don't need $100,000 to trade $100,000 worth of currency. That's where leverage comes in.

If you have leverage of 100:1 then you only need $1,000 to trade a lot, since the money is leveraged at around 100 to 1. Most leverage comes at levels of 50:1, 100:1, and rarely at 200:1, although those ratios do exist out in the world of Forex trading.

These are the most common amounts used, though sometimes you might hear about a "micro-lot" being traded. A micro-lot is 10% of a mini-lot and has a value of $1,000 of currency. Usually, though, all trading will be done with lots and mini-lots. The use of lots allows more trading because a smaller amount of money (the margin) can allow a trader to control a much larger stake of actual currency.

Margin, leverage, lots, and mini-lots are very much connected and allow the common trader to be involved in the Forex market, since you don't need a fortune to be able to trade.

Traders can trade larger amounts of money with leverage than they could otherwise afford, allowing them to make a much larger return on their trades. This occurs because money is being returned on the entire lot, not just on the initial amount in the trader's account. You don't just get the raise in pips that come from a $1,000 lot, but you get the raise in pips from all the money that was leveraged by that lot.

This is how a trader can make profit on a .0001 raise in a currency value, because the sheer amount of currency involved is likely leveraged 100 times over.

The same can happen the other way, however, so while the Forex market offers unmatched opportunities in gaining profit, leverage also magnifies losses when the trader is on the wrong side of a market swing.

You need a good proven trading system to avoid being on the wrong end of a market swing, because as with any market as open and volatile as the Forex, where there's great opportunity, there is also great risk.
About the Author
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From Jason Fielder - Founder, ForexImpact.com
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