Dave, Author at Dave Matias

Magnifying Glass on top of the Calculator is being used to explain margin trading.

Margin accounts, or better known as Margin trading, enable traders to increase the return on investment from their trades.

Using borrowed funds they can control larger positions that they would with their own invested capital.

When margin trading is profitable the returns are magnified. However, there is the other side as well; when trading is not profitable your losses can be multiplied.

Overview of FOREX Margin Accounts

Simply put, in a finance world margin account is a facility which allows trader to borrow on a short-term basis from a broker.

In order to take out a margin loan the trader must first have an account with a traditional or online FOREX broker.

The trader then applies for the option to trade on margin, which acts as a collateral. When this is approved the trader deposits funds into the margin account.

The broker that acts as a counter party, in this case, will have a margin percentage that is required to be deposited.

For example, a currency speculator might want to trade an account with total size of $250,000. The broker and the trader agree that the margin percentage required is 2%. This means that the trader will need to deposit $250,000 x 2% which is $5,000.

Opened lap-top with the EUR/USD chart on it at one of the Broker's platform.

The Advantages of Margin Accounts

Being able to control such a significantly larger position. This is why it can be very profitable to trade on margin.

Imagine two scenarios:

In scenario A the trader is trading $5,000 without margin. Over the course of twelve months of trading they increase their account by 25% or $1,250.

In scenario B the trader borrows on margin at 2% increasing their trading capital to $250,000.

If they increased their account size by 25% over the same twelve months at the end of that period they would have

$62,500 (minus any margin costs and commissions).

The positive difference in returns for profitable FOREX traders who use a margin account can be huge.

Be sure to also read:

…So, What Comes First, the Chicken or the Egg?

Pretty Much Everything You Need To Know About the FX Pips

The Disadvantages of Margin Accounts

Like I’ve mentioned before, margin trading is a double-edged sword. Your profits are greatly magnified when you trade successfully. The flip side is that your losses are likewise magnified when your trades are unsuccessful.

If your trades go against your position and the initial deposit is lost then the broker can initiate what is termed a “margin call”. A margin call is a request for you to deposit more funds or to close out your position so that the margin percentage can be maintained.

In case the speculator is unable to guarantee more funds, or perhaps is hesitant to close out the position then he or she, and yes, there are plenty of female traders as well, may lose control of the trade. Many times the broker will close out the trade in order to avoid any further losses.

One problem is that the trade which may have turned profitable if was held longer may be closed out prematurely. Because of this, traders who use a conservative amount of leverage are generally likely to enjoy more long term success.

Up Town New-York city, representing the margin trading.

Conclusion

As with trading any financial instrument risk and return are related when using a margin.

If, you are willing to increase risk by trading on margin then your potential returns may be many times greater.

At the same time greater margin also means you are more likely to lose all of your funds if you cannot trade successfully.

Make sure that you are confident and have a reliable trading edge before you begin margin trading your way to success.

What Are Your Thoughts On Margin?

Please let us know by commenting below…

Picture of Chicken and the Egg that explains the technical vs fundamental analysis situation.

Of course the chicken first, the species first, then the egg…

How the heck, this relates to trading? – You may ask.

I’ll answer it with the counter question; Which comes first, Fundamental analysis or Technical?

Wow, wow, hold on now Dave… what do you mean by “…which comes first?”

Ok, let me rephrase the question; when trading the markets, which one you, as a trader, mostly pay attention to: the charts, or the fundamentals? Yeah, this is definitely a loaded question.

If you ask any Technician the very same question, he or she may answer that everything already has been discounted in the price, thus looking for the clues anywhere else, but the charts, is a waste of time and effort.

Now, the Fundamental analyst, on the other hand, will give you a completely different answer.

Here is Ralph Seger’s quote “One way to end up with $1 million is to start with $2 million and use technical analysis.”

I don’t completely agree, with Mr. Seger, nevertheless he has his point.

But before I tell you why I disagree, let’s take a look at some of the differences between fundamental and technical analysis.

Let’s take a look at this table:

technical vs fundamental analysis pictorial graph

Source: DailyFx.com

As we can see, Technical Analysis centers around examining a chart information.

There are lots of means of achieving this; some traders using just plain charts and raw price action,

others are employing indicators or complex mathematical systems to place their trades in the present according to price movements of history.

Fundamental Analysis, on the other hand, studies the factors to forecast future price movements.

It is the study of what’s going on in the world (macro-trading) economically, politically and financially speaking.

This particular analysis tends to concentrate on how macroeconomic components such as employment, inflation, interest rates affect whatever we plan to trade.

Monitors with charts, representing technical vs fundamental analysis topic.

Which Is Better?

For many years, fundamental analysis had been considered as the only highly regarded method for medium and long term trading among Institutional traders. Which, has changed recently with the introduction of high-speed processing.

Computer modeling and technical studies became much easier and more widely available. Nowadays, numerous large investment companies use black box trading and high frequency trading, to determine their directional entry and exit areas.

Because of this many of the largest market participants are generating their trading decisions from computer algorithms. The truth of the matter, it is estimated that algorithmic speculation represents from 70 and up to 80 percent of the total volume on exchanges these days.

Whether you like it, or not, the markets have changed and nowadays your trades are moving on technical reasons as much as fundamental ones. In my opinion, the best approach to trading should involve the combination of both.

Also, read: If You think, you can beat these guys at their own Game…think twice!

Conclusion

The fundamental analysis is considered to be more logical, practical part of trading in which you are looking at Global macro-events as well as everyday economic micro-events.

Technical analysis, on the other hand, can tell us a lot about the psychological mood of the market by analyzing past data to forecast future movements.

In a nutshell,

Technicals help to see what has happened, and Fundamentals help shape future price movements.

What Helps You More in Your Trading?

Please share your opinion, and let us know…