Forex margin trading is a way of applying leverage to increase the purchasing power of your money. By applying leverage, we mean we can use a small amount of money to control a larger one. This is made possible by the fact that the likelihood of a currency‘s value changing by more than a specific percentage in the short term is low. So you can place a few hundred dollars in your brokerage account to trade on the margin the amount that you think the price will fall. The balance is, in effect, lent to you by the broker. It is a technique that the makers of trading robots, like the Forex Megadroid Robot, have attempted to build into their systems.

Trading on margins is also known in stock and futures trading, but because of the special nature of currencies, you can get a lot more leverage in the forex market. Each broker has different rules, but it is possible to trade up to 200 times the balance of your trading account.

The possible profits of margin trading is large, but so is the potential losses if it goes wrong. In general, the more leverage you use, the more risky your trading is.

We can understand leverage and margins if we consider an example.

Lets use the British pound sterling and US dollar for this example where the exchange rate is shown as GBP/USD 1.5100. Buying £1.00 would cost $1.51. Imagine you were expecting the dollar value to rise against the pound, so you decide to sell enough pounds to buy $100,000. If your broker used lots of $10,000 each, this would be 10 lots. Then you would sit back and wait for the price to go up.

After a few days you see the price is now GBP/USD 1.4600. Just as you expected, the dollar increased in value making the pound now worth just $1.46. If you sell your dollars now and buy back into pounds, you will have made a profit of 3.3% less the spread. 3.3% of $100,000 is $3,300, so that would be an excellent trade.

The problem here is that not many of us have $100,000 available to trade with. This is where the use of forex trading margins comes in.

Since you are buying and selling different currencies at the same time, your own money only has to cover any loss that you might make if the dollar falls instead of rising. And you would put a stop loss into place to limit that loss, so $1,000 might be all you needed to have in your account to make this $100,000 purchase. Your broker guarantees the other $99,000.

In fact many brokers now operate limited risk amounts where the account will automatically close out the trade if whatever funds you have in your account are lost. This prevents you from getting into a situation where, after several losing trades, you end up losing more than you had in the account. Your account is managed by the broker‘s software, that will not allow your account to get into a negative balance. If you trade with a robot like Forex Megadroid, it is possible to adjust the settings to manage this for you too.

Using leverage in this way is so common in currency trading that you will soon do it without even thinking about it. Still it is important to keep in mind the risks. It is always safer to trade with lower amounts, rather than risking large amounts on a margin. Some people do prefer to use automated systems to manage this type of trading for them, you can download Forex Megadroid yourself and test it on a demo account first.