Wouldn’t it be great if you could invest only $100 in the forex market and trade $10,000? With such small changes in forex prices, wouldn’t you make more profit trading with $10,000 than with $100? And wouldn’t it be even better if you could invest your $100 but trade an astronomical $50,000!? Well, now you can thanks to forex leverages.
What is forex leverage? Basically, when you open an account with your forex broker, what you are opening is called a margin account. You will be given the option of choosing either 10:1, 50:1, 100:1, 800:1 etc etc depending on the broker you chose to deal with. Let us assume you opt for 10:1
To understand forex margins you need first to understand forex leverages so if you haven’t already done so, please click HERE to read up on leverage.
Now, here is the simple definition of a forex Margin – It is a loan, given to you by your forex broker so that you can trade. Let me illustrate this definition.
As a forex trader, you should always have one eye on spreads. When picking a forex broker you should, before anything else, check to ensure they have the smallest spread, mostly single digits below 5.
In today’s forex market, most brokers do not charge commissions for trades or deposits/withdrawals. So, how do forex brokers make money? Through forex spread.
Simply put, a forex pip is the smallest price change that a currency pair can make. More precisely, a pip is the change in the fourth digit in a forex quote. Let us look at an example. If you buy the EURUSD pair at 1.3902 and sell it at 1.3905, you have made a (5-2) 3 pip profit, otherwise known as a 3 pip win. On the other hand, if you buy at 1.3640 and sell at 1.3634, you have made a 6 pip loss. I hope you can calculate and see how we have arrived at that figure.