This article looks at the concepts of trading on the margin and leverage as used on the foreign exchange Singapore market.
Two of the most important concepts that a foreign exchange Singapore trader must understand is leverage and trading on the margin. Both these concepts will be discussed below.
What is a margin?
A margin is the loan offered by the forex broker allowing you to leverage trading funds and securities in your account. This provides you the opportunity to enter greater trades on a small amount of initial trading capital. In order to utilise this margin you must open and be approved for the margin account as the loan is collateralised by the securities and capital in your personal margin account. Unfortunately, this loan is not free of charge and must be paid back with a particular amount of interest according to the broker and your trading style. If you are a day trader you will not have to worry too much about the amount, but swing traders should expect as much as 5-10% interest on the margin.
What is leverage?
The margin is utilised to create leverage on the foreign exchange Singapore market. This allows you to increase purchase power paying less than full price on a trade, as well as making greater trades than could have been made with minimal trading capital. Leverage levels are usually expressed as a ratio such as 2:1. This means that you can hold a position that two times the value of your personal trading account; therefore, a $10,000 account with 2:1 leverage can make a $20,000 trade.
Are all foreign exchange Singapore traders eligible for trading on margins?
It should be noted that not all accounts are eligible for margin borrowing; therefore the leverage available varies greatly according to broker and market. For example, a stock trader will usually use a 2:1 leverage level as compared to the forex trader who utilises the average 50:1 level. In previous years, the foreign exchange market saw traders using 100:1 which allowed for many detrimental losses. While 50:1 is more secure than prior options, it continues to raise the risk of account depleting loss.
What are the risks of leverage?
New traders are the most susceptible to trading on the margin, and this is due to their desire for large profits on small amounts of capital. While using leverage can increase benefits greatly, it also raises the risk involved in a forex trade. This risk can be seen as a risk for profit, but it also increases the risk of loss.
Evidence has shown that good trades with leverage have increase trading account balances dramatically; however, bad trades using leverage have caused disastrous losses more damaging than what the loss would have been if leverage had not been used.
How to use leverage sensibly?
Leverage is generally used in the hope that large amounts can be made, but it is advised that one avoid this or place appropriate risk management methods. The most effective and frequently used preventative technique is the stop loss order.