People who enter into Forex trading for the first time are initially confused by what they are actually trading. Unlike the stock market, where you are buying shares in a real life company that makes real life products or services, the currency market is an abstract animal. When you trade Forex, you are not buying or selling a company or a product but one currency with another currency.
The trading units in the currency market are known as “lots”, just as the units in the stock market are called “shares”, and the ones in the futures markets are “contracts”.
Since the movements in the currency markets are miniscule, a lot in standard Forex accounts comprises of 10,000 units of the base currency. This ensures that even tiny changes in rates make a meaningful profit or loss for the traders. However, no retail trader has the capacity to lay out 10,000 of any currency to get a piece of the action. This is where the concept of margin kicks in.
It is vital to understand how margin and leverage affect your trading. In order to trade Forex, a trader needs to only put up a fraction of the amount needed. In North America, it can be as low as one-fiftieth or 2% of the amount required. Currency trading has extremely low minimum margin requirements compared to other markets. If used judiciously, it can be an immense benefit to the Forex trader.
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