When you want to go to the grocery store to buy an egg, you can’t just buy an egg, they often sell it for 12 dozen.
In the foreign exchange market, it is foolish to just buy or sell 1 euro. Currency in the foreign exchange market is usually packaged and sold, for example, 1,000 currency units (micro), 10,000 currency units (mini lot), or 100,000 currency units (standard lot) , Depending on your broker and the type of account you hold.
“But I don’t have enough money to buy 10,000 euros! Can I still trade?”
You can conduct margin trading!
Margin trading, in simple terms, is a way of using borrowed capital for trading. With margin trading, you can use only 100 US dollars or 1,000 US dollars of funds for 10,000 US dollars or 100,000 US dollars.
Let us explain. Listen, because this is very important.
- You believe that market signals indicate that GBP / USD will strengthen.
- You open a standard lot (100,000 units of GBP / USD), use a 1% deposit to buy GBP, and expect the GBP / USD exchange rate to rise. When you buy 1 standard lot of GBP / USD at 1.5000, you buy 100,000 GBP, which is worth 150,000 USD.
If the required margin is 1%, then you only need $ 1,500 in your account to conduct this transaction. Now you use 1,500 dollars to control 100,000 pounds of funds. We will discuss the margin trading in more depth later, but hope you have a general understanding of this concept now.
- Your forecast becomes reality, and you plan to sell GBP / USD. You close your position at 1.5050, then you make about $ 500.
When you plan to close the position, the initial deposit in your account for this transaction will be returned to your account, and your profit or loss liquidation will also be performed.
The profit or loss funds will then be credited to your account.
The better news is that with the development of retail foreign exchange trading, there are some foreign exchange brokers that allow traders to buy or sell any unit of currency pair. This means that you do not need to trade mini lots or standard lots.