Margin/Leverage
Forex accounts are margined, that means a trader can hold a market position much larger than the value of the trader's account value. Using leverage exaggerates both gains and losses. Even when market conditions are relatively calm, using leverage can generate large gains or losses. In the case where a trader surpasses the maximum leverage allowed (which can happen when account equity shrinks as a result of trading losses), the trading system will close all open positions in the account. This prevents client's accounts from falling into a negative balance, even in a highly volatile, fast moving market.
Example of How Margin Works
Since the trader opened 1 lot of 10k EUR/USD, his margin requirement or Used Margin is $50. Usable Margin is the funds available to open new positions or sustain trading losses. If the equity (the value of his account) falls below 20% of his used margin due to trading losses, his position will automatically be closed. As a result, the trader can never lose more than he/she deposits.
Risk Disclosure: FX Trading Online will not accept any liability for loss or damage as a result of reliance on the information contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets. Currency trading on margin involves high risk and is not suitable for all investors. Before deciding to trade foreign exchange or any other financial instrument you should carefully consider your investment objectives, level of experience, and risk appetite.