Margin Trading

Oct 8, 2012,

Can some body explain me the following,

What is “buying with the British pound at 2% margin” mean?

What does “When you buy one lot (100,000 units) of GBP/USD at a price of 1.50000, you are buying 100,000 pounds, which is worth US$150,000 (100,000 units of GBP * 1.50000).” mean?

"Margin trading is simply the term used for trading with borrowed capital. This is how you’re able to open $1,250 or $50,000 positions with as little as $25 or $1,000. You can conduct relatively large transactions, very quickly and cheaply, with a small amount of initial capital.

Let us explain.

Listen carefully because this is very important!

You believe that signals in the market are indicating that the British pound will go up against the U.S. dollar.

You open one standard lot (100,000 units GBP/USD), buying with the British pound at 2% margin and wait for the exchange rate to climb. When you buy one lot (100,000 units) of GBP/USD at a price of 1.50000, you are buying 100,000 pounds, which is worth US$150,000 (100,000 units of GBP * 1.50000).

If the margin requirement was 2%, then US$3,000 would be set aside in your account to open up the trade (US$150,000 * 2%). You now control 100,000 pounds with just US$3,000.

We will be discussing margin more in-depth later, but hopefully you’re able to get a basic idea of how it works.

Your predictions come true and you decide to sell. You close the position at 1.50500. You earn about $500."