FOREX Trading: The Best Margin Ratio

Margin is the amount a financial institution will loan you on your investment. This amount is generally expressed as a percentage or ratio, and is determined by the liquidity and value of your investment. The most liquid asset that anyone can own is cash; therefore, margins on forex trading accounts tend to be much higher than stocks.

Higher Margin

The best margin ratio, like any other investment strategy, depends on your agenda. It is therefore important to understand the context behind the word "margin." Due to the way the stock market operates, when the price of a stock goes down, so does the perceived value of the business. The forex market is different. Currency fluctuations are not connected to the value of any one business, and liquidity is much higher. This allows forex brokers to provide you with a greater amount of flexibility in relation to your initial investment.

Margin Calculated

Some forex trading accounts can leverage your investment 500 times. Let's pursue an example to understand this better. If you have $50 in your account, you can trade currencies worth $25,000. You are given $500 for each dollar invested. This is a double-edged sword, however, since margin calls are automatic. Just as you might be able to make more money, you can also lose more money when the market turns against you; however, from a profit perspective, the average daily price movement of major currencies is so small that it takes a great deal of capital to be truly profitable.

Best vs. Highest

If you're new to the forex market, trade at a minimum level of margin. Trading more than 20 times can be risky if you're just starting out. However, as you improve over time, you will also increase your certainty about the way the market flows. The biggest risk of maximizing your margin ratio is that the market may make a fast break up or down. The best way to mitigate this risk is to use a stop loss order. This is a predefined check point to cut your losses. You will be automatically taken out of your position if your price reaches this point.

References

• Investopedia: Gettering started in forex options
• Investopedia: Forex leverage - a double-edged sword
• Reputable online forex broker