Margin and Leverage
Although we trade 100,000 worth of currency, we don’t actually need that much. We can use a small amount of our own cash to control a standard lot of 100,000 of a particular currency.
The ability to control a large amount with only a small amount in our trading account is known as Leverage.
Your broker will specify how much money is required in your account in order for you to be able to control a regular or mini lot. The amount required in your account is known as margin. Typically, brokers require $1000 positive balance in your account at all times to trade 1 regular lot. If you are trading 2 regular lots then the margin required will be $2000 and so on. To put it another way, using $1000 to control $100,000 is a leverage of 100:1.
Whilst having an open position by trading a particular currency, if your balance approaches the minimum margin limit, you will receive a margin call. This means your broker will call you and instruct you to either deposit more funds or close your position soon. This is to protect the broker from having to deal with negative balances from their own pockets.
This is why I mentioned a recommended starting balance of $2000. Although you can start trading regular lots straight away, you are advised to begin with mini lots until you are making money consistently. If you start with $300, you will have no choice but to start with mini lots. The margin required for a mini account is typically $25-$50.
posted by Forex 1 million is possible @ 5:50 PM
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