By trading your currencies on margin, you will increase the buying power of your account a great deal.
That means with an account that has a $5,000 balance, you could trade up to $500,000 with a margin account that will allow 100:1 leverage, because you would only need 1 percent of the amount.
In other words, you have $500,000 in margin buying power.
With a greater level of buying power, you can achieve much higher profits with a smaller amount of money. It is important to remember that it is just as easy to achieve larger losses as it is larger wins when you are leveraging your account.
Look out for the Margin Call
As a trader, one of the things you will come to fear most is the margin call. A margin call is basically a notification that your deposits have fallen below an established level.
While utilizing the ability to trade with a margin account can be profitable at times, it is important to understand the risks involved…
Understand everything about how your account works before jumping in to a leveraged trade.
Always read the margin agreement you and your broker have, and ask any questions if you’re not sure about something.
Sometimes you aren’t given the luxury of a margin call, and your entire account could be wiped out by one bad run on the market.
Most of the time your broker will close out your positions when your usable margin has been used up. This will keep you from owing the broker money, even in some of the most volatile markets.
The risk involved with margin calls can be minimized by putting the appropriate stop calls in place. Margin is a very touchy subject between traders, and there are many debates about how much margin is too much. It really depends on the trader, and how disciplined and well-trained they are.
Make sure you learn your broker’s margin account policies, and that you know what risks you are putting yourself, and your account in.
It is also good to know that most margin brokers also require a higher amount of margin over the weekends. Where 1% may have been fine during the week, you will probably need to bump it up to 2% over the weekend.
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