Tue 7 Mar 2006
Marginal trading is making a trade, using not only your own money, but also borrowed money from a broker company. Why should you borrow money, when the first rule of investor is: “never play on stock market using borrowed money” ?
In the foreign currency exchange FOREX market it could be explained, simply because trade currency pairs, usually, moving in a day much less than 1%. Compare this with stock equity market, where 10% is often the case. Because of previously mentioned reason, FOREX broker company (Internet site) gives you possibility of using up to 200:1 leverage.
Let’s consider next example. You bought 100 USD in exchange for 80 euro. In the Internet Forex market you don’t even have those 80 euro but the same 100 USD( remember real and non-real FOREX ? ). With no leverage at all at the end of the day you could make probably 10 cents, may be even less, during the year may be couple dollars. Now let’s take into consideration 200:1 leverage - you had the same 100 USD. With leverage you can make a deal on 20.000 USD during the day currency pair moved the same amount as previously, but you made whole 20 USD. WOW !!!, you can say. 20% profit in just one single day. But, what if currency pair moved in the other direction ???? You would lose the same amount. Yeap, this is the TRUTH of the FOREX market : fast gains - fast losses.
You should be careful, then. Right? This is second tip on FOREX market. What can stop you from bankruptcy ? Stop and limit orders - You had 100 USD in the begining of the day - system will protect you from negative ballance. When in the previous case the currency pair will move down more than 0.5%, or 50 cents on your 100 USD, or 100 USD on your 20.000 USD deal (don’t forget your leverage) means you lost your 100 USD completely and your position will be closed for your protection. More detailed information some time later.