1. Lower Margin
Just like futures and stock speculation, a forex trader has the ability to
control a large amount of the currency basically by putting up a small amount of
margin. However, the margin requirements that are needed for trading futures are
usually around 5% of the full value of the holding, or 50% of the total value of
the stocks, the margin requirements for forex is about 1%. For example, margin
required to trade foreign exchange is $1000 for every $100,000. What this means
is that trading forex, a currency trader's money can play with 5-times as much
value of product as a futures trader's, or 50 times more than a stock trader's.
When you are trading on margin, this can be a very profitable way to create an
investment strategy, but it's important that you take the time to understand the
risks that are involved as well. You should make sure that you fully understand
how your margin account is going to work. You will want to be sure that you read
the margin agreement between you and your clearing firm. You will also want to
talk to your account representative if you have any questions.
The positions that you have in your account could be partially or completely
liquidated on the chance that the available margin in your account falls below a
predetermined amount. You may not actually get a margin call before your
positions are liquidated. Because of this, you should monitor your margin
balance on a regular basis and utilize stop-loss orders on every open position
to limit downside risk.
