Trading Margins & Leverage
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Basics of Trading Margins
This is where we learn the basics of trading with more money than you have; trading margins. Not everyone has enough money to trade in lots of 10,000. Margin trading is what lets you trade larger lots with smaller amounts of money.
Essentially what you’re doing is borrowing the money to make the trade. You’re trading with someone else’s money, and it’s what lets you use small amounts to fund large enough forex trades to make a decent profit. Margin trading lets people use as little as $250 to open a position of $100,000. It’s what lets the smaller players make their money.
When you’re trading on the margin, you’re going to be trading in “Lots” which were mentioned briefly earlier in the course. For now all you really need to know about a lot is that it’s the smallest amount of margin required to place forex currency trade.
It’s like going to the grocery store and buying hotdogs. You don’t buy them one at a time, you buy packages of eight. Eggs are the same way; you buy them by the dozen, not individually. It’s not worth anyone’s time to trade currency below certain minimum amount. With pips on most currencies being at the fourth decimal point (one-hundredth of a cent for the USD) you can’t make enough money on small trades. So in forex, you typically trade lots of $10,000 or $100,000 depending on your account or broker.