A key concept to understand when you’re just starting out learning about the forex, is forex margin. The margin given to a trader on the forex is beyond that of most other markets, and it can take a trader out of the game rather quickly. Having a proper understanding of how margin works, and how you should use it will keep you in the game longer than most.
Margin allows you, as a trader, to purchase more currency than you would if you had to rely on the balance in your account. The typical margin with Forex accounts is 100 to 1, meaning that with a 1,000 dollar deposit, you are able to buy 100,000 dollars worth or currency. This is necessary in order to take advantage of the small fluctuations that occur in the exchange rates between currency pairs. If you were only allowed to invest with your $1,000 account, you’d never make the profits that you’re probably looking to make on the Forex.
However, that being said, you don’t jump right in and max out the amount of leverage given to you. You have to start slowly and work your way up. Even as you progress as a trader, you shouldn’t ever fully max out your leverage. At most you should only utilize around 10% margin on any given trade. This means for your $1,000 account, you should be sticking to mini or micro lots (worth only $10,000 or $1,000 respectively), and as you build up that account, you increase your trade sizes accordingly without actually taking on more margin (and more risk). In time you will build up a sufficient amount of capital in order to meet your profit expectations. Make your abilities meet your expectation over time, rather than forcing your desired profits onto your abilities (or lack thereof when you’re first starting out).
You should now have an idea about how margin works on the Forex, and how to best use it to your advantage. When you are just staring to learn trading and investing on the foreign exchange, simple things like this can make or break you. Having this understanding should get you off on the right foot in your currency trading career.