A Brief Overview on Margin Trading
Margin trading is trading with borrowed funds, and is closely related to leveraging. The broker allows the trader to control a far greater amount of money in the market in exchange for a small deposit of funds, with the understanding that the sum borrowed must be returned in exact amount, with any losses or profits returned to the trader's account.
The amount that the trader can control is determined by a number called the leverage ratio. It's not that difficult to grasp what the leverage ratio does: it simply multiplies the trader's potential losses and gains in the market by the specified amount. For instance at a leverage ratio of 1/100, the trader will be able to control 100,000 USD which is a standard lot, for a deposit of a mere 1,000 USD, and every single pip gain or loss will be multiplied a hundred times. To put this in a better perspective, you need a movement of just 1% in the price quote before your account is doubled or wiped out.
Leverage can be your friend - or foe. At UpFX™ we don't recommend a leverage higher than 1:200, and even 1:100 is playing more safely. However, we do offer higher leverages and ultimately the client chooses. While we don't have any financial interest in how much leverage you take and if it results in your winning or losing, we're partial to winners since we make money taking traders to the market... and a zero balance account doesn't help either of us.
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