Best Forex Strategies For Margin Trading

In margin trading, you avail leverage from the forex broker, which amplifies the trade size without the need for additional capital. You get to place bigger trades with a smaller amount of capital to fulfil the margin requirement. You can easily determine the accurate margin points that you need based on your capital with the help of a margin calculator and in this article, I will tell you about the best forex strategies for margin trading. 

But before learning about margin trading strategies, you need to learn some key margin terms that you will need to carry out margin trading with ease. 

Key Margin Terms

• Initial margin and maintenance margin – Initial margin is also known as deposit margin and it is the minimum amount that has to be deposited in the trading account for opening a trade position. However, this initial margin may not be sufficient to cover the loss if the market ends up moving against your expectations. For this, the trade will need to maintain an additional margin which is the maintenance margin. This is the minimum amount of capital that you will need to keep a leveraged trade open while encountering a loss. 
• Margin call – Margin call happens when there is a margin shortfall due to the account balance reducing after you lose a leveraged trade. The broker will notify you about the margin being insufficient to cover for the loss and you will have to deposit the required amount for keeping the trades open. If you fail to do that in time, the trades will be automatically closed by the broker as the account balance will not be enough to keep the trades running.
• Negative balance protection – When you choose a broker for margin trading, you need to make sure that they offer negative balance protection to stop your trading account from going into negative balance if you encounter substantial losses while trading with leverage. Placing a stop loss or being notified about the margin call may not save you from losses when the market is too volatile or an unpredictable event happens, resulting in price gaps or slippage.  

 

Best Strategies For Forex Margin Trading

• Scalping

Scalping is a short-term strategy where you will be opening and closing smaller-sized trades within a few minutes to make profits from the most minor price movements. The price fluctuations in forex currency pairs are stated in pips as the unit of measurement and scalpers only target a few pips profit in each trade. Pip calculations and converting them to monetary value in your account currency can be time-consuming when you do it manually and most traders depend on a pip calculator to estimate the number of pips they should aim for to be profitable in a trade.

The profit potential of scalping can be limited when you look at individual trades but scalpers can earn a good amount of profits on a regular basis if they are consistent and have a sound strategy. They will be entering multiple trades daily and will be exiting all the trades within a short span of time whether it is a profit or loss. Scalpers always avail high leverage for maximising their gains while opening smaller-sized trades and this makes it a suitable strategy for margin trading. However, scalping is an intense trading style as it requires constant monitoring. 

As a scalper, you will have to limit the risk per trade as you will be executing several trades on a daily basis. You can surely make more profits while using leverage but you need to be careful and avoid overtrading. Because you may be tempted to enter more trades when you have enough margin in your account. But you need to follow a cautious approach and manage the risk well based on your trading goals and risk appetite. It would be better to start small and use limited leverage until you start making consistent profits as a scalper. 

• Adding to Trades

The 2nd approach for margin trading in the forex market is not about following a particular strategy for placing and executing trades. Instead, here you will only be adding to the trades which you are already winning. This strategy can increase your profit potential if the market keeps moving in your favour but it can also lead to huge losses if there is a sudden reversal. You will be starting with a smaller position size and then you will be using more margin to increase the position size. However, this strategy also required a sound risk management plan.

You need to set a trailing stop loss instead of a regular stop loss, as the trailing stop loss will be moving itself to limit the potential losses and lock in profits. The trailing stop loss will be adjusted automatically based on the market fluctuation and this way, you can minimise the risk of loss if there is an unexpected reversal after you have added to the winning trades. But you should also be monitoring the market situation and be ready to exit the trade if you sense any kind of risk. You should be even more careful when the market is volatile or when there is a news event. 

• Hedging

The third strategy that you can follow for margin trading in the forex market is hedging. Hedging is actually a strategy to offset the risk of an existing position by opening another position that is opposite to it. For instance, if you are going long on the EUR/USD pair, there is a risk of loss if the price of the pair drops and in this case, you can hedge the risk by opening a short position. You can also select a correlated pair, instead of trading the same pair for hedging. Using leverage for your hedging position can help strengthen your strategy.

When you are planning to follow complex strategies like hedging for margin trading, you need to be careful with the calculations as even a small mistake can lead to huge losses and you should be using tools like trading calculators while making trading decisions. Trading calculators can be found on trading platforms and also on your broker’s website. Using such tools is good for getting precise data with minimal effort while also eliminating the chance of manual errors. They provide instant results once you enter the required data for calculation. 

The amount of leverage that you should be taking for hedging needs to be calculated after considering the size of your existing position and the amount of risk that you want to offset. You can also hedge the risk by placing a trade with a pair that is negatively correlated to the other pair. In this case, if you are going long on the first pair, you need to open a buy position for the negatively correlated pair too. By doing so, you can offset the risk with hedging. However, you should be monitoring the price movements and exit the trade if you see any unfavourable fluctuations.   

• Carry Trading

Carry trading can be another perfect strategy for margin trading as you will be holding a trade for an extended duration to earn profits from the swap you receive from the broker. The typical carry trading strategy involves borrowing an asset with a low interest rate and using it to buy an asset with a high-interest rate. In forex, this asset will be a currency pair like AUD/JPY with the perfect interest rate differential for making gains from the swap. Swap is always seen as a cost for keeping the trade position open but in carry trading, you will be earning profits with it.

When you choose to avail leverage for carry trading, you need to consider the overnight risk and manage your trades based on that. Carry trading strategy is very different from other strategies where you only look at the exchange rate fluctuations. In carry trading, interest rate differences are the most important and you will be less bothered by the currency price movements. By using leverage, you can amplify the trade size and earn more profits from carry trading. But you should also have a plan for managing the risk as a certain amount of risk will always be there in any strategy. 

Final Words

So, these are the best 4 forex strategies that you can follow for margin trading. However, the success rate of these strategies highly depends on your knowledge and skill level as a trader and you cannot expect to make high profits just by using leverage. You should only be using limited leverage based on your risk tolerance as using excess leverage can lead to huge losses. You cannot expect to win every single trade even with a perfect strategy and hence you should be careful while trading with leverage in the volatile forex market. However, leverage is a great tool to maximise your profits if you follow a cautious approach in margin trading.