This post will discuss marginal trading or usually called margin trading. In the previous post, I also mentioned margin trading, particularly the post about margin calls. The margin call in my previous post is closely related to margin trading as this is where the margin calls are happening if you run out of money in your forex account. However, in this post, we will delve more into margin trading as this is important to know so that you will know the red thread that connects margin trading with leverage and also margin call.
Marginal Trading
Following the book of Dicks (2010, p. 5), marginal trading itself makes you able to trade with a small amount of money which refers to borrowing capital from your broker. The broker only requires you to deposit the minimum deposit margin according to which brokers you choose. With margin trading means that if you want to trade forex you do not have to buy it like you buy in the stock market which requires you to buy shares from the company you choose at the price that is on the stock market as in the margin trading you can just open a long and a short position with a small amount of money.
Thus, with a small amount of money, you can open a position whether it is long or short. An example of margin trading in forex is when you open an account on the broker you choose before and you start to trade with money that you deposited. After that, you know that you have set leverage to your needs so that you can amplify your original investment. For example, when you open a long position after the three bullish candle soldiers (and other confirmations) and the candle moves up, then you will gain unrealized profit which you can realize by closing the position if you want.
How Does It Link To Forex?
From what I researched previously, you can trade forex in two ways. First, from the bank directly and second from the brokers who provide forex trading. The first is where the primary market (however there is also a bank that provides you CFD forex) is happening where you can buy other currency and that currency can be saved in your saving account and will remain there as long as you have access to your bank account. For example, I have a Jenius bank account which lets me be able to buy USD with my IDR, and thus if I decide to buy $1000, then I would have $1000 in my savings account with the real price and the currency (physically if I want to withdraw it).
On the other hand, if you decided to trade actively in the forex market such as buying and selling at a certain period of time, then this is where the derivative market provided by the brokers shows its usefulness because in this market you can open a position bigger than your deposit amount of money as there is the leverage feature that provides you to be able to open a bigger position with a small amount of money. For example, I decide to deposit $1000 into my forex trading account and with that set of amount if I set 1:100 leverage, then I would be able to open a position of $100,000 units per lot where usually per pip movement is equal to $10 (like EURUSD pair).
Conclusion
Marginal trading or margin trading in forex itself is useful to amplify your gain especially if you set leverage to your rational calculation also with the combination of good risk management so that you know the amount of lot you should open for a position. Lot and leverage are what make margin trading lucrative, however, always remember that whenever it is lucrative, then there must be risk behind it. It means that margin trading is far riskier than the primary market such as you buy currency directly from the bank into your savings account.
Written by Andre I.
Reference
Dicks, James. 2010. Forex Trading Secrets: Trading Strategies for the Forex Market. New York: McGraw Hill.