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Trading on a margined basis in foreign exchange
is not a complicated concept as some may make it
out to be. The easiest way to view margin trading
is like this:
Essentially when a trader trades on margin he is
using a free short-term credit allowance from the
institution that is offering the margin. This short-term
credit allowance is used to purchase an amount of
currency that greatly exceeds the account value
of the trader. Let's take the following example:
Example: Trader x has an account with EUR
50'000 with ACM. He trades ticket sizes of 1'000'000
EUR/USD. This equates to a margin ratio of 5% (50'000
is 5% of 1'000'000). How can trader x trade 20 times
the amount of money he has at his disposal? The
answer is that ACM temporarily gives him the necessary
credit to make the transaction he is interested
in making. Without margin, trader x would only be
able to buy or sell tickets of 50'000 at a time.
On standard accounts ACM applies a minimum 1% margin.
By trading with ACM, trader x has the capacity to
make transactions up to 5'000'000 EUR at a time.
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