Margin trading is one of the strategies traders use to trade in the forex industry, with options trading being another famous means. Although trades can make high returns with both tactics, there are risks attached to their usage, which are peculiar to each.
As a beginner in the forex industry, selecting the best trading strategy between the two may seem difficult. This guide will help with its simplification.
Meaning Of Options Trading
Options trading requires purchasing or selling of trading opportunities rightly over a specific time at a fixed value. Traders can either make a put option or call option. Put options appear by selling a market over a set time at a fixed value after the trader goes short.
A call option occurs by purchasing options whose value increases and results in a gain for the trader. Purchasing and selling in Options trading are possible such that taking a long position means writing a put, and writing a call means taking a short position.
It is a good strategy for speculating the value of the assets. However, there is a potential of no limit to the number of risks encountered when trading options.
Advantages Of Options Trading
- The risks involved in options trading are low.
- Buying or selling the assets is the right of the traders, not obligations, and once the market does not favor them, they can let it expire.
- After selling an option, the buyer gives you a premium
- Income generation is possible through premiums with options trading
Meaning Of Margin Trading
Margin trading is the method of using an individual’s asset to acquire a loan from a broker. Later on, the money obtained is used in the form of trades. An investor has to open a margin account to buy on margin and make a small initial investment. T
his sum acts as the leverage, and it is called the minimum margin. The amount invested in the trade is called the initial margin, and the amount of money kept in the margin account is referred to as the maintenance margin.
If the sum amount falls below the value, the broker will call to either deposit more money or pay back all the loan by using the leftover funds or liquidating investment in a practice known as a margin call. There are risks attached to not trading with your own money, even though collecting the broker’s money to fund trade may look appealing.
Advantages Of Margin Trading
- It helps in amplifying the profits of the traders.
- It helps traders have a controlling ability over a huge number of shares
- Although it is risky, it provides trading opportunities for traders
- Experienced traders with low capital can execute trades with the help of margin
Selecting The Best Trading Strategy
Margin trading and options trading are good strategies to help traders get returns. However, how they work is dissimilar, and the preferred strategy will depend on the profile of traders.
Knowing the risk involved in each trading technique will help traders decide which is best suited for them. With options trading, there is a possibility of the future price prediction of a product being incorrect.
Also, when there is a fall in an asset’s price after purchasing a call option, traders tend to suffer losses. Likewise, traders lose money by purchasing a put option, and the value of the underlying product rises afterward.
Margin trading has risks such as losing more money and still needing to refund the broker with interest. Unlike options trading that you are not obligated to, there are instances in which you are obligated to sell your assets when using margin trading.
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Traders navigating the Forex industry and want to trade can use margin or options trade, as both are good strategies. Traders get to amplify their returns with the help of margin trading.
However, it can also amplify loss whenever the market does not go as predicted. Regardless of the strategy you want to use, it is essential to understand how each of them works and how to use them effectively to make profits. Each of these trading strategies has risks, but the risk of options trading is less than that of margin trading.
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