Forex Converter & Forex Quotes

A forex trader can use the concept of leverage to substantially increase his profits for a particular investment. The instruments that can be used to leverage their investments include margin accounts, futures, and options. In forex, the trader will apply leverage to benefit from the minute fluctuations in the value or quote for a currency pair.

To explain what leverage is in forex trading, it is simply a loan that is provided by a broker to the forex trader. When someone wants to enter the forex market, he can open a margin account with a broker. The amount of leverage for a margin account is usually expressed in ratios, such as 200:1, 100:1, or 50:1. The leverage will usually depend on the contract size that an investor will want to use. For example, the standard contract size is 100,000 units of the base currency. For a currency pair where the base currency is the U.S. dollar, a standard contract size will mean $100,000. This is a substantial amount of money, but the average investor may be able to use this amount through leverage. Brokers usually provide a leverage of 50:1 or 100:1 for the standard contract size. Therefore, the investor will only need to put in $1,000 if the leverage is 100:1. A leverage of 100:1 is also known to have a margin of 1 percent. This means that the investor has to put up 1 percent of the actual value of the contract, which is $100,000.

Now, let us take a look at the concept of margin call to have a better idea of the risk that is involved when using leverage. Simply put, a margin call is an event when the forex trader's account equity drops below the required margin. The forex broker will often have a minimum size for an account, which is also called the initial margin or account margin. For example, this could be $5,000 or $10,000. After depositing this amount, you may start to trade.

A margin call happens when the forex broker starts to worry that you may have made a mistake in your judgment. For example, the value of the currency that you are holding may start to decline instead of rising as you have expected. Let us say that you are using a margin of 1 percent in your leverage and thus your margin is $1,000 for the standard contract size. If the broker observes that your losses are almost $1,000, he may decide to issue a margin call, which means that he may require you to put in more money or he will automatically close your position. This is done to prevent more losses for you and for him.

There are several ways to stay away from a margin call. One way is to make sure that you are not over trading. Trading very close to your limits is very risky and may easily trigger a margin call. You may also apply a stop loss for each position if you do not have sufficient margin.