What is Margin Trading – Trading Volume
Foreign Exchange market is the largest decentralized market where the volume of daily transactions equals to billions of dollars. The minimum volume of the transaction in the interbank market is too high and is assuredly not accessible for private investors owning small means. Due to margin trading individual investors have possessed an oportunity to make online transactions with various currency pairs.
What is Margin Trading
So what is margin trading? It is simply the execution of transactions, the volume of which exceeds the level of investor's funds. The process is the following: the client invests funds that can be $100 only, for example and receives credit (leverage) by the brokerage company which enables him to execute transactions of large volumes and to make high profits. Without taking a leverage the trader will have to either invest additional funds or just trade with small volumes.
Margin trading definition, as it can be seen, is quite simple. The word “margin” is usually referred to the pledge that the broker temporarily holds from the client's deposit for opening positions of certain volume. Margin is sometimes called deposit that is a required precondition for getting a certain amount of credit (leverage). Trading on margin implies consecutive performance of two opposite transactions – opening and closing a trading position. In Forex market traders are not really buying currencies, they are just interested in the rate differences, on which they are doing speculations and this result in either a profit or a loss.
For a better understanding how all this takes place let us bring an example.
Let us assume that you have decided to open a position with EURUSD currency pair with 10.000 volume. The current price in the market is 1.0911/1.0912. This means that you need to have approximately $11.000 for opening such a position. Due to margin trading you can just have $200 capital, take 1:100 Forex leverage and open this position, since in this case you will have a total of $20.000 balance on your trading account. You can open both long and short positions, since margin trading allows speculating on the market regardless of its direction.
From the example brought above it becomes clear how trading becomes easy and available for everyone due to leverage in Forex which is the key feature of margin trading. Leverage is defined as the ratio of the client's funds to the size of the broker's credit. By using it smartly it can positively influence on trading results, and vice versa. It is never recommended to use the whole balance in opening a single account, since in case the market goes in a different direction it may result in losing the whole funds in a moment.
What is Trading Volume?
All instruments are traded in volumes. Traders decide to open positions of high or low volumes. So, trading volume is the size of a position that is opened, no matter the position is long or short. Mainly, position volumes are expressed in lots, while in NetTradeX trading station, provided by IFC Markets all positions are expressed in volumes, not in lots. All instruments have a minimum required trading volume, below which it is impossible to set an order. For currency pairs in NetTradeX trading terminal the minimum trading volume is 100, while in MetaTrader 4 it is 1000 (0.01 lot).
To summarize, margin trading is trading through Forex leverage that increases your trading capital. It is a perfect tool for trader to possess large amount of money and use it rationally to increase profits. However, it is very important to keep in mind that the whole leverage should not be used at once, since it both increases the possibility of making a profit and suffering a loss.