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Forex Trading on Margin

The leverage that FX traders have access to is one of the characteristics of forex trading (please note that high leverage and low margin can magnify or lead to both substantial gains and losses in a trading account). When an investor trades on margin, he does not need to deposit the entire dollar amount of the transaction. The brokerage firm where the trader opened his account provides a portion of the value of the transaction. In stock trading, the margin requirement (amount that must be deposited by the trader) is 25% for opened positions. This means that a trader needs to deposit 25% or of the value of the stock position he is trading. Consequently, the maximum leverage available to stock traders is 4 to 1 (1 / 0.25 = 4).

Now let's look at the margin requirement to trade currencies. The margin requirement available to Forex Trading USA's customers is only 1%. This means that an FX trader only needs to deposit $1,000 for each $100,000 position traded. A 1% margin requirement is equivalent to a leverage of 100 to 1 (1 / 0.01 = 100). This leverage is 25 times greater than the leverage offered to stock traders; a big difference! For forex mini accounts, the leverage is even greater; 200 to 1, which is equivalent to a 0.5% margin requirement.

Because the maximum leverage that our customers enjoy is 100 to 1 (200 to 1 for mini accounts), it doesn't mean that you should use it all on every single trade. Please realize that the greater the leverage used, the more speculative the trading becomes. Nevertheless, having the ability to use a great amount of leverage whenever it is appropriate to do so gives the currency trader a lot more flexibility in his trading and implementation of different techniques. The amount of leverage that a trader should use varies on every trade. This is why in our free forex training and in our mini forex e-book and standard trading e-book we teach our customers the right amount of leverage to use when trading currencies.

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