Are you about to start trading in Forex? If so, you're certainly planning to use leverage to multiply your profits. But in order to use leverage, you'll have to know about Forex margin requirements.
Currency pairs will each have specific Forex margin requirements, and these are related to regulatory decisions, as well as expectations from the market.
Let’s take a look at what exactly Forex margin requirements are, and how they will affect you.
What are Forex margin requirements?
Forex margin requirements go hand in hand with leverage. When you use leverage, you are essentially trading on values that far exceed what you're actually depositing. The “margin” refers to the actual deposit.
Forex margin requirements, therefore determine what you have to deposit in order to trade. For example, a margin requirement of 1:50 implies that you have to deposit 2% of the value of the trade.
Why Forex specifically?
Margin requirements are much more pertinent to Forex trading, because of the high leverage that is available. Whereas with stocks, you may be able to trade at 1:2, with Forex you can sometimes trade at 1:500.
This is what makes it so easy to get involved in Forex trading. You don’t need the big bucks to get started.
Are all Forex margin requirements equal?
No, Forex margin requirements differ widely, depending on the amount you're trading, the currencies you're trading, and the regulatory bodies involved.
So, with smaller amounts, you may get leverage of up to 1:500, whereas, with large amounts, you'll get 1:50.
Also, actions by the Swiss bank raised margin requirements on pairings with the CHF to 1:20, and with the AUD or JPY to 1:33.
The inherent risk
Just because what you deposit (i.e. the margin requirement) is relatively small, does not mean that you cannot lose big. When trading on leverage, you're up to lose as much as you can make. Your deposit can be seen as representative of a bigger amount, rather than as the amount you're putting into the pool.
What does this mean to me?
Forex margin requirements will help you determine if you can afford the trade. If you do not have the money to make the margin payment, you cannot trade (and you should not even be considering it). Furthermore, you need to make the calculations to determine how much you stand to lose. Again, if you are risking more than you are able to lose, you should reconsider making the trade in the first place.
When you're starting to trade in Forex, you'll need to have a good grasp of these concepts. Forex margin requirements are going to play a big part in all of your trade decisions. Make all the necessary calculations and, once you've got the numbers down, be responsible.
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