Trading on a margined basis in foreign exchange is not a complicated concept as some may make it out to be. The easiest way to view margin trading is like this:
Essentially when a trader trades on margin he is using a free short-term credit allowance from the institution that is offering the margin. This short-term credit allowance is used to purchase an amount of currency that greatly exceeds the account value of the trader. Let's take the following example:
Example: Trader x has an account with EUR 50'00. He trades ticket sizes of 100'000 EUR/USD. This equates to a margin ratio of 2% (2’000 is 2% of 100'000). How can trader x trade 50 times the amount of money he has at his disposal? The answer is that the OFB temporarily gives the necessary credit to make the transaction s/he is interested in making. Without margin, trader x would only be able to buy or sell tickets of 2’000 at a time. On standard accounts OFB applies a minimum 2% margin.
Margin serves as collateral to cover any losses that you might incur. Since nothing is actually being purchased or sold for delivery, the only requirement, and indeed the only real purpose for having funds in your account, is for sufficient margin.
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