The phrase 'Don't bite more than you could chew' is a very popular reminder for us to take precautions on the things that we do not have the capacity to control. But as human beings, we seldom can resist the chance to do more than what we are really capable of, especially if it would bring a greater reward. Margin Trading is somehow guilty of this phrase.
Margin Trading is a peculiarity of the financial markets that allows traders to trade beyond the accounts capacity. Brokers lend the fund to traders in order to have the ability to transact on bigger proportion.
To be able to do so, an amount is required for such to serve as a collateral – a margin. A margin ensures that the trader's account will not occur loss more than its true capacity. The size of the margin depends on the size of the leverage and volume of trades. A part of the trader's capital is frozen to serve as a security deposit. The unfrozen part is called Free margin wherein it could be used to open new positions.
If such case that the loss is already near the margin, the trader should replenish the account to cope up on the occurring losses. If the trader failed on replenishing the account, a margin call may occur. It is an automatic closing of all opened trades thus turning all the losing trades into real loss. Margin call may differ depending on which broker you are trading with. In order to avoid such unfavorable circumstances, it is recommended to use Stop Loss and Take Profit. It would seal the trade in case of it either in winning or losing side.
Though leverage bears a really great advantage, but we must keep in mind that bigger profit involves bigger risk.
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