Margin
is money you need to have in your broker account to secure your open
position. Different brokers require different amount of margin money to
keep your positions open. In forex market, trading on a margined basis
is not a complicated concept. Basically, when a trader trades on
margin he is using a free short-term credit allowance from the broker
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.
For example:
Trader
X has an account with EUR 50'000 with ACM. 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 x trade 20 times the amount of money he has
at his disposal? The answer is that he temporarily receives the
necessary credit to make the transaction he is interested in making.
Without margin, trader X would only be able to buy or sell tickets of
50'000 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.
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