What is Margin Forex trading?
Margin Forex is an over-the-counter derivative product which enables traders to leverage a small margin deposit for a much greater market effect in relation to currencies. A foreign exchange contract involves the exchange of one currency for another. Margin Forex differs from spot and forward foreign exchange trading in that they are legally classified as derivatives rather than foreign exchange contracts, and are cash settled (i.e. no physical delivery is available). Margin Forex trading generally involves taking forward positions in a foreign currency and instead of those contracts being settled by exchange of the relevant currencies, the positions are “closed out”. Closing out involves entering into equal and opposite position with the issuer, which generates a profit or loss on the transaction, which is then settled between you and the issuer. The resulting profit or loss of the trade is the net result of the difference between the opening and closing exchange rates of each transaction, adjusted for transaction costs.
To start trading Margin Forex, you need to open a trading account with a margin FX provider. As per above, there is no physical currency transferred upon settlement when you trade Margin Forex. They are cash-settled derivatives which are used to speculate about exchange rate differences.
The main participants in this market are the large banks, financial institutions, import & export organisations, retail & wholesale investors. Financial centres around the world function as anchors of trading between a wide range of multiple types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market determines the relative values of different currencies.
Features of Forex Trading
Forex trades can be made 24 hours a day, 5 days a week. It starts Monday morning 7am (Australia Eastern Standard Time) and finishes Saturday morning 7am (Australia Eastern Standard Time).
With daily turnover exceeding 5.3 trillion USD, the foreign exchange market is exceptionally liquid. This means that entering and exiting trades is generally easy due to the high volume of trading in all directions.
Go long or go short
Margin Forex is not traded on an exchange or centralised clearing house. It is an over-the-counter (OTC) derivative contract which is issued by a licensed provider. You can speculate on movements in the underlying instrument in any direction.
Margin Forex are leveraged contracts, which means a small price movement in the underlying asset on which they are based can result in substantially magnified profits or losses, exceeding your investment. Leverage allows investors to take larger exposures, however it similarly makes them susceptible to larger losses.
Trading in Margin Forex and other OTC derivatives entails risk and is not suitable for investors who are not trading with risk capital (money you can afford to lose). OTC derivatives are cash-settled and provide exposure to price movements in the underlying instrument, rather than ownership or physical delivery of the underlying instrument. Please ensure you obtain independent professional advice before investing in OTC derivatives, and read our Financial Services Guide, and the issuer’s Product Disclosure Statement to ensure you understand the key risks and costs associated therewith. Please click here for further information regarding the risks.