Whether you are foreign exchange trading or saving money in an account, you will have an account balance. In forex you have a concept called trading on margin, which takes a balance of your account funds to open a position. There are two things in the foreign exchange market that go hand in hand: margin and leverage. Both will be explored here to help you understand how you would open a position in the market. Before you can think about managing a position or closing it out for profit, you have to comprehend the basics of opening a position.
Opening Foreign Exchange Trading
How much capital do you have for forex trading? Unless you are a millionaire you probably do not have 1 million to open an account with. Unless you have more than $50k AUD a year as your income, with no family and a small mortgage, you probably do not have $100k to invest either. Most people foreign exchange trading will not have more than $10k to invest in the market. It is more likely that you have under $5000 AUD to begin your forex account.
The average investor is a middle class person with a family of four, pets, a mortgage, and some major expenses. They are looking to start an account with a few thousand at most.
Unfortunately trading for any profit takes money. The more money you have the easier it is to invest. If you have $100k and your account requires 100,000 as the contract size you would spend your entire account balance on one trade.
This is why foreign exchange trading has margin. The margin balance is a percentage of what needs to be in your account to place a trade. Remember the word leverage? Leverage is what makes up the rest of the traded funds for your open position.
Perhaps you have $500 AUD you would place on a trade for EUR/AUD. You are selling USD to buy EUR in a contract size of 10,000. It means you will buy 10,000 EUR by selling the equivalent in AUD. Yet, you only have $500 AUD to put into the trade. What do you do?
Foreign Exchange Trading Offers a Helping Hand
Leverage is a helping hand since it makes up the difference of your margin amount to invest in a larger lot size. If your account allows for 100:1 leverage you could have $100 in your account and open a position of 10,000. It means with $500 you would use a smaller amount of leverage than 100:1 to open the position. The calculation for leverage and margin percentages will not be here; however, it is something to learn about in a more indepth tutorial.
The point of this article is to teach you that you can trade with a small amount in your account based on the amount of risk you are willing to take. You can take advantage of foreign exchange trading on margin by using leverage from the broker. With such an option comes higher risks though.