In forex trading jargon margins and leverage imply margin trading or leveraged trading. In reality you can start forex currency trading with a very small amount of capital outlay called as initial margin. Leverage is expressed by ratio and margin is stated in terms of percentage. Forex trading brokers offer leverage ratio starting from 50:1 and it can be as high as 200:1. The same thing when expressed as margin percentage, it can be stated that the margin required is 1% if the leverage ratio is 100:1.

• For example if your forex trading broker asks you to pay 1% margin, then you have to pay 1000$ for buying or selling 1 standard lot size of 100,000 units of any forex pair. Alternatively to put in plain words, you are getting a trading exposure multiple of 100 times on your initial margin.
• All the future markets of stocks, indices and commodities work on leverage or margin. Margin percentage depends upon the market segment, exchange and the broker.
• Forex currency trading markets offer the highest leverage or impose lowest margin requirements. This is the most important advantage of global forex trading business.
• Most of you must be aware about the magic of compounding. Same holds true for margin trading in forex. Let us see an example on what wonders can margin trading or leverage create.

Your analysis and conviction dictates you that EURO will appreciate to a level of 1.5600. In anticipation you buy 1000 EURO/USD at 1.5550. As a matter of fact you have bought 1000 EURO by paying 1555 USD. Your trade turns in your favor and the exchange rate goes up to 1.5600. Immediately you sell 1000 EURO/USD at 1.5600. You have sold your 1000 EURO in exchange for 1560 USD. Let us work out the profit under two different scenarios.

• Without leverage: Profit = 1000 x (1.5600 – 1.5550) = 5 USD. Your return on investment (ROI) is 0.5%.
• With leverage: Let us presume that your forex trading broker has given you a leverage of 100:1 Now with the same investment of 1000$, you are in a position to buy 100,000 EURO/USD. Profit = 100,000 x (1.5600 – 1.5550) = 500 USD. Your ROI is 50%.

Don’t you think that magic of leverage creates wonders? Well, it does, but let me caution you that there are dark sides as well. Suppose if the trade went against you and EURO/USD fell to 1.5500. You will land up with a loss of 5$ without leverage but the loss would be 500$ with leverage. Do you realize the actual implications? You have ended up with a loss of 50% of your capital in just one trade.

Summing Up

• Risk management is an extremely important function in forex trading.
• Risk management and surveillance systems followed by forex trading brokers and forex trading company are different. In case your forex trading position is making huge losses, you may be called upon to jack up your margins. It may happen that in the event of acute volatile market conditions your loss making position would be squared off automatically by the forex trading system.

According to me you must have spent days to learn about forex currency trading. You might have also spent few bucks on forex trading course in order to acquire an exhaustive knowledge. Well, I would say that you are on the right path to becoming a successful forex trader.

Once you have finished your forex trading training the next step is to open a forex trading account with a forex trading broker. With wide spread awareness of advantages of trading forex, the markets have witnessed a huge influx of investors like you and me who are eager to grab their share of pie from forex currency trading. In order to cater to the growing demand, the forex markets are flooded with ever increasing number of forex trading brokers. Choosing a right forex trading broker is though not a very daunting task but it does require some basic research on the various parameters. I have discussed few important factors to guide you through selecting a right forex trading broker.

Online or Offline: First of all make up your mind about the suitability of online or offline forex trading. Most of the points discussed here are applicable to both online and offline forex currency trading. However If you intend to do offline forex trading then you may not bother much about forex trading software and demo account. Make sure that sufficient support services for offline forex trading are in place at the end of the forex trading broker.

Forex Trading Software: This is the backbone for online forex currency trading. Ensure that the forex trading platform is state of the art. Look out for the following important feature.

1. IT infrastructure and user friendly features.
2. Real time quotes, multiple windows, types of orders, number of currency pairs and speed of execution of orders.
3. Charting, technical analysis and other analytical tools.
4. Research and Analysis: There are ample value add on services like tips on entry and exit points, forex indicators, real time access to fundamental and technical research reports and global news broadcasts. Find out are there any extras for these services?

Demo Account: Most of the forex trading brokers offer you a free practice account or a demo account for at least 30 days. However if it is not offered then insist upon it. Demo account enables you to get an in-depth idea about forex trading platform.

Account Related: Read and understand all the paper work before signing any documents. Find out (1) What is the minimum balance requirement (2) What is the margin and leverage and (3) Whether the back office is fully online. Nowadays you can start with as low as 250$ account and leverage ratio as high as 200:1.

Trading costs: There is only once cost – Bid/Ask spread. Pips charged by the forex brokers vary from 2 to 5 Pips, lower the better. Ensure that there are no other hidden costs and charges.

Customer Support and Reputation: I will not deliberate much on this factor as it can be ascertained only after the experience. However you can take the reviews from friends or internet bloggers community.

Regulatory: Forex market is not regularized. Safeguarding the interests of the investors is the done by the statutory financial authority of the respective countries. In USA, the forex trading brokers registered with CFTC and NFA should be preferred.

Take a look at our Forex Broker Reviews and Comparisons.