Understanding Forex Margin for Small Retail Traders

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Buying on predetermined margin is extremely important when dealing with foreign exchange or forex. That is because the set standard amount of transaction is a whopping $100,000, which is a lot. With almost trillions of dollars traded every day 24 hours, the currency trading market draws millions of investors from all over the world.

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Since stock trading normally involves a huge level of volatility, the opportunity for getting high returns exists. Also, the large volume of the market, profit accumulation regardless of market rise and fall, commission free trading opportunities etc. make forex trading attractive.

The fact is, when volatility or risk factor is high, the profit potential becomes high too. Small forex investors only came in the picture recently, because a few years ago, only hedge funds, investment banks, and large corporations could trade in the market. It is only because of leveraging accounts that forex market trading is possible for small players.

Many brokers let mini-investors get involved by investing just $10,000, although the standard rate is $100,000. In fact, micro-lots are allowed too, which need a person to invest only 1% or $1000. In the event that any kind of loss is faced, the collateral of 1% is secured by the broker.

Since the minimum amount required for trading is quite large, leverage trade is necessary for any retail trader to get involved. However, there is often some kind of interest attached for processing purposes, and although leveraged trading allows small traders to accumulate huge profits during good times, the added processing costs make losses huge too.

Leveraged forex trading has certainly helped the market secure sheer volume of traders. Besides, generally the possibility for negative account does not exist, because as soon as the margin gets used, a broker closes the account of a trader. However, it is important that traders put emphasis on placing a stop after margin gets used, because otherwise, losses may sometimes go as high as $100,000!

The thought of losing a huge amount of money can be scary for small retail players, but as far as a trader has a good knowledge regarding various forex options, dramatic losses can be avoided largely. It is just a matter of putting stops in the right places to eliminate the possibility of dramatic losses from emerging. That way, a trader does not have to deal with impossibly high standard forex rates, and yet, can benefit from high profits.

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