What is Margin? Why it Doesn't Really Matter

Margin on Forex. The Issues. Why it Isn't Relevant.

People are always telling me how dangerous trading foreign exchange is because of the high leverage or the margin that is given. I disagree. If you have incorporated risk management into your trading strategy then margin isn't relevant unless you are just trying to place too large a position.

What is margin in forex trading?

The easiest way to look at it is, when a trader trades on margin he is using short term credit from the broker he is using to trade in order to carry out his trade. This allows the trader to purchase an amount of currency that greatly exceeds the account value that the trader possesses.

In foreign exchange trading, it is almost inevitable. Either the size of contracts generally exceeds what the trader has as an account value, or realistically it disables the trader from properly using risk management tools since all his money will be tied up by one trade.

Why Its Not Your Leverage that Matters

The US has been greatly cutting the amount of leverage one is allowed to trade with. I understand their reasoning, since for untrained traders high leverage can lead to accounts being wiped out in seconds.
BUT... like anything else that involves money, you really shouldn't be trading without giving yourself the very basic of training.

When you trade you should be trading with a trading strategy. This implies that you know exactly what the maximum is that you are willing to risk in any trade. This amount is your stop and should not be changed (yes, everyone), unless its to your advantage, as in you're in the money.

So it doesn't matter if you are leveraged 100:1 or 20:1, if you have determined that the maximum you will risk in a trade is 20 pips, then that is your risk and leverage should not change that. If your predetermined risk exceeds your leverage amount, either you're: 1 - trading too many contracts or 2 - don't have enough money in your account.

At all times you should be following basic risk management principle that the maximum you risk per trade is no more than 5% of your account. Most professional traders go as low as 1%-0.5% of their account to ensure their longevity in the market. Better to build your account slowly and steadily. Otherwise play the lottery.