Starting an account and learning to buy and sell isn’t all there is to Forex. Understanding some core rules about the market is necessary to trade properly.

1 of those rules would be the high liquidity and low natural volatility of the market. Currencies do not change by rapid percentages the same way that stocks and options do. In fact, when trading currencies, you are always forced to trade with leverage.

So what is leverage? Basically, leverage is regular trading terms means money borrowed from the broker. This manifests in multiples, where adding $1 to your account may increase leverage, depending on the settings of your account.

For example, let’s say you’re doing a 50:1 leverage. This ratio means that for every $1 you put into your account, you can purchase up to $50 worth of currencies. This leveraging allows you to profit considerably off the tight movements in the FX market. This ability to leverage is what spawned the ability to trade the market on shorter timeframes.

Of course, the ability to leverage does not come without a cost…

Understanding the concept of margin. Your margin is the amount of money required in your account to open a certain trade, especially on margin. If you’re trading on leverage, which is a must in FX, then you’re borrowing broker’s money. This means that any form of error you do, may cost the broker too.

In addition to the concept of margin, you also have something called margin calls. This is when your account runs below the limit required to trade effectively. This tends to occur a lot with high margin traders, especially those who low experience in the markets.

Margin calls are best understood when we look at the flipside of leverage. You see, leverage can be a double-edged sword. When you borrow money for a trade, you stand to make more money, basically for free. If you’re on a 50:1 margin, you invest $1, while your broker invests $49. You then get to profit off the $1, and the $49!

But what if you lose money on that trade? While your gains multiply, so do your losses. And because brokers need to safeguard their borrowed money, you must understand that any losses the broker would sustain, are subtracted from your account.

This means that if you lose money on the $49, the losses get subtracted from the $1…

A simple and tiny mistake in such circumstances can put your account in the red. Thus, you should be extremely calculated when making an investment.