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Margin & Leverage

jeffriess
May 22, 2020
by Joseph Jeffriess, Market Analyst

Margin

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

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?

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).

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 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.

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 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 higher leverage is one of the most common errors committed by new and inexperienced Forex traders.

Please also keep in mind that it is your own responsibility, not our, 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 result, advising that you do not have sufficient equity to support current open positions – please note that this does not guarantee your balance will not go into negative as trade execution depends on market liquidity and pricing.

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