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Margin Requirements to Trade Currencies

How much leverage do you really get?

Since currencies are traded in lots (or contracts) and each standard lot is worth 100,000 units of the base currency, how much money does a day trader need to buy or sell one lot?

To give you an idea of margin at work, let’s first look at an example with stocks. If a trader in the United States was trading stocks intraday, 100,000 worth of stock will require a margin deposit of 25,000 (one fourth the value of the entire investment, which is the same as a 25% margin requirement). This represents a leverage of 4 to 1 (since margin and leverage are reciprocals of each other).

In the currency world, the margin requirement can commonly be anywhere from 200 (0.02%) to 2,000 (2%) units of the base currency per lot depending on the broker.

This represents a leverage of 50 to 1 to 500 to 1 (from 12.5 to 125 times the available leverage in stock trading). Even though a 50 to 1 margin is typically excessive for most trading styles, it is available to the trader nevertheless. The trader is free to decide what amount of leverage to use depending on the nature of his strategy, his available trading capital, and the risk he is willing to take on each transaction.

The use of leveraged trading multiplies a traders gains as well as the losses – so proceed with caution when you decide to use it.

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