TRADE

Margin And Leverage


Forex Swap Rates and Spreads Explained

What is FOREX LEVERAGE ?

Leverage trading, also known as margin trading, is a system which allows the trader to open positions much larger than his own capital. The trader needs only to invest a certain percentage of the position, which is affected by many factors and changes between instruments, brokers and platforms. Leverage trading is popular amongst traders and brokers, and is a common trading system nowadays. “Leverage” usually refers to the ratio between the position value and the investment needed, and “Margin” is the percentage of the position needed.

Examples of Forex Leverage

Forex Trader A is $ 5,000 USD:

If Forex Trader A has a 10 : 1 leverage account and they want to use $ 1,000 for one forex trade, they will receive $ 10,000 in base currency ($ 1,000) = 10 x $ 1,000 = $ 10,000 (trade value)

Forex Trader B is $ 5,000 USD:

If Forex B traders take advantage of a 100 : 1 account and they want to use $ 1,000 in one Forex trade, they will receive $ 100,000 in base currency ($ 1,000) = 100 x $ 1,000 = $ 100,000 (Trade value)

ACCESS UP TO

1:999

leverage on fx

advantages to trading with leverage


Minimizes the capital the trader has to invest. Instead of paying the full price for an instrument, the trader can pay only a small portion of it. for instance – if a position’s value at the time of opening is $3,000; instead of paying the full amount, he can employ a leverage of 400:1 – meaning for every $400 in actual value he will be requested to invest $1 of his own capital. This mean that for this position he will need $7.5 to open it.

Some instruments are relatively cheap, meaning almost every trader can trade them easily. However, some are considered more prestigious, and based on their traded frequency and other factors are more expensive. Instead of investing large amounts in order to take part in their market, one can use leverage and enjoy the fluctuations in the price of those prestigious instruments.

While leverage trading, or margin trading, has less capital involved which can be a major advantage for many traders, it also comes with a loss risk. As one can gain much more than his initial investment, losses can occur on the same scale. It is important to keep track of opened positions, and apply stop loss and other in order to prevent large scale losse

What is Margin ?

Margin is the amount of money needed as a “good faith deposit” to open a position with your broker.

It is used by your broker to maintain your position. Your broker basically takes your margin deposit and pools them with everyone else’s margin deposits, and uses this one “super margin deposit” to be able to place trades within the interbank network.

Margin is usually expressed as a percentage of the full amount of the position. For example, most forex brokers say they require 2%, 1%, 5% or 25% margin.

Based on the margin required by your broker, you can calculate the maximum leverage you can wield with your trading account.

MARGIN
REQUIRED
MAXIMUM
LEVERAGE
50% 2 : 1
3.33% 30 : 1
2.00% 50 : 1
0.50% 200 : 1

What is Margin ?

Margin is the amount of money needed as a “good faith deposit” to open a position with your broker.

It is used by your broker to maintain your position. Your broker basically takes your margin deposit and pools them with everyone else’s margin deposits, and uses this one “super margin deposit” to be able to place trades within the interbank network.

Margin is usually expressed as a percentage of the full amount of the position. For example, most forex brokers say they require 2%, 1%, .5% or .25% margin.

Based on the margin required by your broker, you can calculate the maximum leverage you can wield with your trading account.

What is a Free Margin in Forex ?

Free margin refers to the equity in a trader’s account that is not tied up in margin for current open positions. Another way of thinking about this is that it is the amount of cash in the account that traders are able to use to fund new positions.

This can be explained with an example

Equity: $10 000

Margin allocated to existing position: $8 000

Free margin = equity – margin on open positions

Free margin = $10 000 - $8 000

Free margin = $2 000

Margin requirement

This is an easy one because we just talked about it. It is the amount of money your broker requires from you to open a position. It is expressed in percentages.

Account balance

This is just another phrase for your trading bankroll. It’s the total amount of money you have in your trading account.

Used margin

The amount of money that your broker has “locked up” to keep your current positions open. While this money is still yours, you can’t touch it until your broker gives it back to you either when you close your current positions or when you receive a margin call.

Usable margin

This is the money in your account that is available to open new positions.

Margin call

You get this when the amount of money in your account cannot cover your possible loss. It happens when your equity falls below your used margin. If a margin call occurs, some or all open positions will be closed by the broker at the market price.

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