Margin & Leverage
What are they?
One of the main components behind trading Forex is that it is normally undertaken on the basis of margin trading or trading with leverage. The Forex market offers some of the highest leverage (and therefore low margin rates), making it an extremely attractive proposition to traders.
Margin can be thought as the deposit required to open and maintain positions. This is not a fee or a transaction cost but a portion of your account equity set aside and allocated as a margin deposit. Margin is normally expressed as a percentage of position size (e.g. 2% or 5%).
Leverage involves borrowing a certain amount of money needed to gain exposure to a particular market, with a relatively small deposit. Leverage allows you to take a position of much higher value than the monies deposited in your account. It is commonly expressed as a ratio.
How do they work?
Let’s take the following example:
You have a trading account with EightCap with a balance of $10,000.
If you have an account leverage of 1:1 and wish to use $1,000 on one single transaction as the margin, then you will have exposure of $1,000 in base currency ($1,000) = 1 x $1,000 = $1,000 (trade value). Meanwhile, if you have an account leverage of 100:1 and wish to use the same amount of margin on a single transaction ($1,000), then you will have exposure of $100,000 in base currency ($1,000) = 100 x $1,000 = $100,000 (trade value).
The concept here is that you have been temporarily given the necessary credit to open the transaction that you are interested in making. Without this margin, you would only be able to buy or sell transactions of $1,000 at a time.
Thus, the margin requirements will vary depending on your leverage ratio, or in other terms, a higher leverage equals to a lower margin requirement.
How to check leverage?
At EightCap, all trading accounts are initially set up with a leverage of 100:1 as a standard and clients have the option of changing the ratio from 1:1 all the way up to 500:1.
To find out the current leverage on your account, simply go to the Navigator area on your MetaTrader 4 platform, click ‘Accounts‘ and hover your mouse over the account number. A pop-up window should now appear showing your current leverage and base currency (see image). Alternatively, log into the Client Portal area and your account leverage will be shown next to your login numbers.
How to choose leverage?
Your trading style will greatly dictate your use of leverage and margin.
It is imperative to understand that trading with leverage can affect your trading experience both positively and negatively as both profits and losses are dramatically amplified. Trading with higher leverage ratios may not be suitable for all type of traders and may be too risky for some.
In order to help traders in minimising their risks, we have specific leverage restrictions in place (see table).
To see how much leverage you can use on your trading account, please refer to the information. It is there to guide you on the available leverage options.
|Available Leverage||Min. Account Equity||Max. Account Equity|
|Available Leverage||Min. Account Equity||Max. Account Equity|
How to change leverage?
If you wish to change the leverage ratio on your EightCap trading account, you can do it easily either by submitting a request through the Client Portal area or emailing us at email@example.com.
Again, higher leverage ratios may not be suitable for every trading style. If you are looking to trade with higher leverage, please remember: leverage is a double edged sword. Yes, it can assist in opening a larger trade size, but thus amplifies gains and losses.
The bottom line.
Using leverage allows for significant scope to maximise the returns on profitable Forex trades. After all, applying leverage means you can be controlling currencies worth 100 or more times the value of your actual investment.
However, if the underlying currency in one of your trades moves against you, the leverage in the Forex trade will magnify your losses and these losses may add up very quickly and without sufficient margin remaining in your account, you run the risk of those losses turning into realised losses.
If you are a new or inexperienced trader, we highly suggest that you consider limiting your leverage to a low level. Trading with a higher leverage is one of the most common errors committed by new and inexperienced Forex traders.
Please also keep in mind that it is client’s own responsibility, not us, to continually monitor positions and make any margin payments as they become due.
Our trading platforms have a built-in automatic stop-out system to monitor and control risk exposure in real-time. If your account equity falls below the margin requirement, a ‘Margin Call’ warning will ensue, advising that you do not have sufficient equity to support current open positions – please note that this does not guarantee the balance will not go into negative; trade execution depends on market liquidity and pricing.
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Risk Warning: Margin trading involves a high level of risk, and may not be suitable for all investors. You should carefully consider your objectives, financial situation, needs and level of experience before entering into any margined transactions with EightCap, and seek independent advice if necessary. Forex and CFDs are highly leveraged products which mean both gains and losses are magnified. You should only trade in these products if you fully understand the risks involved and can afford losses without adversely affecting your lifestyle (including the risk of losing substantially more than your initial investment). A Product Disclosure Statement (PDS) and a Financial Services Guide (FSG) for our products are available to download from our Legal Documentation page. You must assess and consider them carefully before making any decision about using our products or services.
EightCap is a registered business name of EightCap Pty Ltd (ABN 73 139 495 944). We are regulated by the Australian Securities & Investments Commission (ASIC) - our AFSL number is 391441. This licence authorises us to provide financial services to people in Australia.
The information on this website is of a general nature only and is not directed at residents in any country or jurisdiction where such distribution or use would be contrary to local law or regulation. EightCap is not a financial adviser, and does not issue advice, recommendations, or opinion in relation to acquiring, holding or disposing of a margined transaction. We provide general advice only and accordingly you should consider how appropriate the advice (if any) is to your objectives, financial situation and needs before acting on the advice.