Getting a loan for trading Forex is not difficult—the challenge is learning how to manage it. Another term for loans on forex is called margin. The money you invest in your position is used as collateral for the loan. The forex market is the largest, most liquid market in the world; it is also one of the least volatile markets as price movements rarely move more than 1 percent over any given day. That said, the forex market is also largely unregulated. Brokers, therefore, have the right to provide almost limitless margin.
Most online trading houses set a cap at 200 to 1, however, 500 to 1 ratios are not uncommon. In laymen terms, a 200 to 1 margin means that the brokerage is willing to lend you $200 for every $1 invested. If you have $5 in your account, you have the buying power equivalent of $1000. It isn't hard to find a brokerage willing to give you a loan. Almost all forex brokerages will provide you with a margin due to the liquidity in the market. The challenge is understanding how to best manage your margin.
With the opportunity to make more money comes the opportunity to lose more money. Using margin loans requires a strict trading plan. The use of stop limits to guard against automatic liquidation of your account is essential in order to mitigate the risk of losing your entire investment on one big swing in the market. It is not unusual for first time traders to be "blown out" on the first trade. Identify a range the currency is trading within. Set your stop limit order safely outside of these ranges.
In general, when you set up an account with an online broker, you will have the option to choose your loan (margin) amount. Start off with a small amount, say 10 or 20 to 1. If you're still profitable with this strategy after 3 months, reward yourself with an increase in margin to 40 to 1. Understand that the speed in which you can make or lose money is directly related to the amount of your margin account.
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- Corporate Finance Institute. "Gross Margin Ratio." Accessed Aug. 15, 2020.
- U.S. Department of Housing and Urban Development. "Adjustable Rate Mortgages (ARM)." Accessed Aug. 15, 2020.
- Consumer Financial Protection Bureau. "For an adjustable-rate mortgage (ARM), what are the index and margin, and how do they work?" Accessed Aug. 15, 2020.
Working as a full-time freelance writer/editor for the past two years, Bradley James Bryant has over 1500 publications on eHow, LIVESTRONG.com and other sites. She has worked for JPMorganChase, SunTrust Investment Bank, Intel Corporation and Harvard University. Bryant has a Master of Business Administration with a concentration in finance from Florida A&M University.