Margin and Leverage

Margin and Leverage




Margin and Leverage is very common within the trading industry, and it’s important that all traders from newbies to the experienced have an understanding of how they work.

Margin

Margin is the initially deposit you put into your broker account, and is used as collateral to enable you to borrow (leverage) when trading the markets.

When trading Forex the typical broker account will have a 1% margin requirement (this may vary depending on broker).

Margin and Leverage

Now let’s say you as a trader in the Forex market put’s on a £100,000 position. As per the chart below would be the equivalent to a trade at £10 A PIP.

With your £100,000 position if the trade goes against your analysis and you end up losing 1% on the £100,000 position you will lose £1,000.

The initial £1,000 you put into your broker account was leveraged by 100 times, and the 1% loss mean you’re now wiped out.

Now say  if you had deposited £10,000, so your initial margin was £10,000 and take the same £100,000 position,  and your £100,000 position goes against your analysis and you end up losing 1% on the £100,000 position you will still lose £1,000. However the £1,000 will have been 10% of your £10,000 leaving you with £9,000 left to trade in your account.

Margin and Leverage

In the above example (using a practice account) using Margin and Leverage we have placed a Buy Trade, at a £100,000 position with an account balance of £10,000. (100:1 Ratio)

As you can see from the image we get filled at 1.17858, the trade has gone against us and even using a 1 minute chart you can see how just a tiny movement to 1.17791 so just 6 pips and we’re already at -£57.01 LOSS.

Leverage

Leverage within the Forex market is one of the highest traders can achieve.

Leverage is basically a loan that is provided by a broker to a trader

When the trader decides to trade Forex, he must first open a margin account with the broker.

The broker will provide leverage of an amount which can vary between brokers but can usually be about 100:1 or 200:1, sometimes even as much as 500:1 again depending on the broker.

A 100:1 ratio means that the trader is only required to have at least 1% of the total value of the trade available in the trading account, so to trade £100,000 position the 1% will only be £1,000

A 200:1 will mean a trader a trade a £200,000 position and will need only £2,000 within his account.

*BEWARE with leverage the ability to earn huge amount of profits by using leverage is substantial, however leverage can also work against trader.

Please note, if the currency in one of your trades moves in the opposite direction of what you believed would happen as per your analysis, leverage will greatly increase the potential losses.

 

*Please Note, Binary Options and Forex trading can carry a high level of risk to your capital as you could lose all of your investment. These products may not be suitable for every investor, therefore ensure you understand the risks and seek independent advice. Invest only what you can afford to lose




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