Margin trading is not for all kinds of traders. It is somewhat more suitable for trading styles that are short-term like scalping or day trading. This is because margin trading seeks to extract returns even in small price movements. These profits are then increased through leverage. Most of the time, traders are attracted to trade forex in the Forex market for the fact that it is very accessible, 24 hours a day for 5 days. All of these are made possible with only a low-level capital.
But then, retail traders in MetaTrader 5 (MT5) jump to the conclusion that Forex trading is the best for them without realizing the risks that it involves. Once a trading account in Forex is opened, a margin account can also be accessed. However, amidst the pool of information available online, there are still a lot of traders who fail to provide the clear and exact definition of leverage and margin trading, two of the most used terms in trading Forex.
Understanding Margin Trading
Margin trading works differently than cash accounts. With margin accounts, you get to use the money you borrowed when you open and hold a position in the Forex market. It also gives traders more exposure to the financial asset compared if you use cash as capital on your trades. Every position you open in the Forex market, it accompanies a certain margin requirement. This is the money that you put aside, also known as a security deposit or collateral to the broker.
Leverage is known as the by-product of margin
With a small percentage that you put up when opening a position, or margin, it is being opened up as leverage or better known as gearing. If you want to understand more about margin trading, you first need to understand the terms used in this trading platform including margin calls, initial margin, negative balance protection, maintenance margin, and others.
A margin call will be received from the broker whenever a trading position goes out against you making your current position insufficient in covering the margin requirement.
Also known as deposit margin, this is the minimum required amount when you open a position in Forex trading. Since this margin is just a small part of the entire value of the position, the amount will not cover the entire losses in case the market turns its back against you.
Negative Balance Protection
This negative balance protection aims to keep safe traders during times of higher volatility. With the help of this, traders will not be able to face a negative balance, resulting in owing more than the amount you deposited.
This negative balance protection comes in handy whenever margin calls and stop-loss orders won’t be sufficient to avoid too many losses incurred when you trade forex in MetaTrader 5 (MT5)
This maintenance margin is used to ensure that your account will never have insufficient funds. To keep your trading positions open, you need a sufficient fund that will cover any losses acquired. The maintenance margin is the minimum balance needed to maintain your trading account active.