Margin Trading

Trading on a margin in foreign exchange is not as complicated as some may make it out to be. The easiest way to view margin trading is like this:

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. Let's take the following example:

Example: Trader Y has an account with EUR 50'000 with FOREX International. He trades ticket sizes of 1'000'000 EUR/USD. This equates to a margin ratio of 5% (50'000 is 5% of 1'000'000).

How can Trader Y trade 20 times the amount of money he has at his disposal?

FOREX International temporarily gives him the necessary credit to make the transaction he is interested in making. Without margin,Trader Y would only be able to buy or sell tickets of 50'000 at a time. On standard accounts FOREX International applies a minimum 1% margin. By trading with FOREX International, Trader Y has the capacity to make transactions up to 5'000'000 EUR at a time.

Margin serves as collateral to cover any losses that you might incur. Since nothing is actually being purchased or sold for delivery, the only requirement, and indeed the only real purpose for having funds in your account, is for sufficient margin.

The margin capacity FOREX International offers is a reflection of our willingness to provide the trader with the level of risk he wishes to adopt. We do not recommend trading with full 1% margin capacity as this involves a large amount of risk. However, the choice is left to the trader to make transactions that meet his appetite for risk.