The breakthrough in currency trading has come from forex margin whereby small retail traders are making the most of the small amount of money they have.This is indeed a new era where foreign exchange trading is no more confined to the biggest banks.The notion of margin comes from the equity market and now allows everyone who is interested to trade the currency market.But unfortunately many traders who join the forex market leave without much success because they do not understand the mechanics of forex margin.

Forex Margin is usually defined as the fraction of the total value of currencies that a person wants to trade. So if you have the intention to trade $100,000 worth of currencies your forex broker will request a margin of $1000. Technically speaking you have leveraged your trading account by 100 times.

Retail forex brokers always quote currency pair such as GBP/USD (i.e. GBP in terms of USD). As an example let us suppose that the GBP/USD is currently trading at 1.5000. This means that with one pound you will get 1.5000 US Dollars. So if you want to buy 10,000 pounds at the current market price of 1.5000 you will have to sell 15,000 US Dollars. And your forex margin in this case will be only $150. I hope that you can now see how with only a fraction of $150 you can trade up to $15,000 worth of currencies

Now let us see how this can work against the small retail trader.

You have 2 trading accounts with two different brokers, Broker A has 2% margin requirement and Broker B has 1%. We consider the above example of the GBP/USD trading at 1.5000. You have a capital of $5,000 in your trading account, and trade mini 10K lots which means that when price goes up by 0.0001 or by a pip, your profit increases by $1 dollar, but if it falls by one pip you lose $1. We also assume that you want to put $300 as margin on each trade.

From the above assumption given that broker A requires a margin of 2%, to buy or long one mini lot of GBP/USD you will thus put your $300 (2% x 15000) of margin. On the other hand, Broker B has a lower margin requirement of 1% and thus you will be able to buy 2 lots because here you need to put only $150 as margin for one lot. Let us say that you are unlucky and the GBP/USD swings 50 pips to the downside . The consequences of this unfavorable move are clear: with broker A you lose $50 ($1 x 50 x 1 lot) but with broker B you lose $100 ($1 x 50 x 2 lots)

Therefore technically you have used a leverage factor of 100 with broker B but a leverage factor of only 50 with broker A..The most important point that you must grasp here is that with Broker A less risks are involved because you have leveraged your account by only 50 times..This is why the Commodity Futures Trading Commission (CFTC) has proposed to reduce leverage in the currency market

In fact the CFTC hopes to bring down substantially the leverage available to retail forex traders to 10-1. The proposal was part of a larger regulatory overhaul of retail forex by the CFTC, enabled by authority granted to it in the Food, Conservation and Energy Act of 2008, or the Farm Bill. If this proposal is enacted this means that the potenial of forex margin will be drastically reduced so much so that small retail traders will have to give more funds to the forex brokers to trade the same amount of currencies..