Margin FX trading overview

Margin FX trading overview

FX is the abbreviation for Foreign currency Exchange. FX trading is similar to exchanging currency at money changers. However, an exchange fee from an FX company is so cheap that we can earn money through it.

Suppose the exchange rate is 45 pesos to the dollar and I deposit 5 million pesos in my account (Actually, I deposited Yen because I’m a Japanese), I can buy 100,000 dollars for 4,500,000 pesos. I can ignore the exchange fee because it is very small. If I sell 100,000 dollars when the exchange rate moves up to 46 pesos to the dollar, I can get 4,600,000 pesos. This means that I will earn 100,000 pesos.

Margin FX trading allows us to buy a greater amount of currency than what we have deposited.  If the FX company offers me a maximum leverage rate of 20 :1 and I deposit 5 million pesos when the exchange rate is 45 pesos to the dollar, I can buy 2,000,000 dollars. If I sell 2,000,000 dollars when the exchange rate moves up to 46 pesos to the dollar, I can earn 2,000,000 pesos, which is 20 times as much as leverage rate of 1:1.

If the currency rate moves to the opposite way of my forecast, I lose money.

The advantage of margin trading is that I can earn greater returns on my trades. However, I may incur greater losses as well.