What Beginners in Forex Trading Must Know about Trading Margins

by Andrew McGuinness     Jul 16, 2019

The Forex trading arena is the biggest exchange of money in the world. Every single day, over $1.8 trillion dollars moves in the Forex trading system, making it massively larger than the stock trading market or the cryptocurrency trading system. In fact, the average trade on the Forex trading system is valued at about $100,000 USD, and is referred to as a "lot." But with so much money moving and trading hands, how can it be possible for beginning Forex traders to compete with institutions on the market, which can include banks, investment firms, and even entire governments of foreign countries? The answer is a relatively simple process commonly referred to as "trading on the margin."

Margins are essential for smaller investors, and the process of trading on the margin is the only reason why it is possible for individual investors to engage in Forex trading. Trading on the margin is a process that involves investors "putting up" a comparatively smaller amount of money (usually beginning at $1,000) to use as leverage, and then "borrowing" money from a brokerage firm to compete on the Forex trading system. The standard margin is referred to as "100:1," which means that for every dollar put into your trading profile, you can trade $100 on the Forex market. As you can see, this means that it quickly becomes much more simple and less expensive for individual investor to trade a lot with a much smaller amount of money than putting up $100,000 right off the bat (an amount of money that most individual investors do not have available in liquid cash at any given moment).

Each brokerage firm and even sometimes each individual broker determines how much leverage investor can trade on. Leverage is an inherent risk for lenders because if they allow a trader to carry more leverage than they are able to be responsible for, the brokers will have to pick up the bill if the trader falls into debt or loses too much money. The leverage that you will be able to acquire as a Forex trading newbie will heavily be dependent upon your credit and how you have managed your money in the past. If you have an outstanding credit score and you've never defaulted on a loan or a bill, you can garner up to 250:1 leverage from some firms. On the other hand, if you have a poor credit score, you will be seen as a "high-risk trader," which will leave brokers more hesitant to essentially loan you money.

Understanding how to raise your credit profile can be crucial to becoming a successful investor in the Forex trading sphere. If you have a low credit score, focusing on making your payments on time and avoiding opening multiple inquiries at a single time can help you raise your credit profile, which in-turn will lead you to more opportunities to gain leverage and profit when Forex trading. If you find yourself unable to gain enough leverage to trade at least a lot, taking some time to focus on how you can improve your credit score is the first step to moving towards the ability to become a high profile trader. Don't be afraid to use this time to brush up on your trading know-how by signing up with a website that specializes in helping those just starting out in Forex trading learn the most effective trading methods. Then, by the time you're ready to trade, you'll be able to avoid the costly mistakes that kick beginners out of the game before they even get started!

Get unlimited access to our Learning Center,
Broker Insights and Exclusive Promotions for Free!