Margin Trading

Trading on a margined basis in foreign exchange is not a complicated concept as some may make it out to be. The easiest way to view margin trading is like this: Essentially when a trader trades on margin he is using a free short-term credit allowance from the institution that is offering the margin. This short-term credit allowance is used to purchase an amount of currency that greatly exceeds the account value of the trader.

When an investor uses a margin account, he or she is essentially borrowing to increase the possible return on investment. Most often, investors use margin accounts when they want to invest in equities but they do not have enough money to invest. These margin accounts are operated by the investor's broker and are settled daily in cash. But margin accounts are not limited to equities - they are also used by currency traders in the forex market.

One of the best advantages of Forex Trading and one of the reasons that its so appealing for traders is that you can't loose more money than what you have spent in the beginning. This is called the "margin", and even if you had a bad trade you know youll never loose more than this.

What is the risk?
There is always risk associated with margin trading. Traders experience profit or loss on the position size that they control, not on the small cash outlay that they make (initial margin). Risk can be compounded if traders over-leverage their trading accounts, or use up almost all of their buying power. Trading in such a manner can quickly lead to significant percentage losses and even account liquidation.

The risk and return is always going together. The forex margin trading is much speculative, and then, risky. You can allow ten times as much position as trading in the forex margin trading. And so, it just means that you would have to take more than n ten times as much risks at the same time.
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