Many people are attracted to forex compared to other financial instruments. In forex, you can get higher leverage than stocks. “Leverage” is a well-known term in trading. Very few people know the definition and the exact impact of “leverage.”
If you do not understand and calculate the impact of leverage, then you are not ready for forex trading.
By using leverage, you can borrow money from the broker to place a bigger position in a trade.
Key points of leverage
- Leverage is borrowing money to place a bigger trading position
- You can use leverage through margin trading, and forex brokerage accounts allow ou the use of leverage.
- The borrowed funds in the leverage normally comes from the brokerage account.
- Leverage can significanty aplify your profits as well as losses.
What is leverage?
Leverage will give you the ability to control a large amount of money using very little or none of your own money. You will borrow the excessive money from other or brokerage accounts.
In forex, money is usually borrowed from the broker house. In forex, you can trade a big position by spending a small amount of your own money.
Assume your broker allows you to open a 1:100 leverage account. It means if you deposit 1 dollar broker will allow you to trade $100. Say you deposited $1000, and now the broker will allow you to place a trade of $100,000. Say, your $100,000 trade rises to $101,000. It means you made 1000 dollar profits. It means you made a 100% gain for your initial $1000 deposit.
Without using the leverage, your $1000 trade will make a $10 profit; it means a 1% gain. This way, leverage allows you to place a large trade position, and you can rapidly make some big gains.
But do not think only about gains. When your trade goes against your speculation, you will lose big money in the same way.
For a new trader, leverage is the main reason to wind up the whole trading fund.
If you make a $1000 trade without borrowing any money from the broker, then you are using 1:1 leverage.
What is Margin
In forex, the margin is the process of having a good faith deposit to open and maintain a trade position. Margin is the part of customer balance, that is set aside to place a trade.
Margin value varies from brokerage to brokerage. Your brokerage can change the margin requirement periodically based on various market situations and volatility. When the market is more volatile and unpredictable, the broker house might reduce the margin. When the market is stable, it might increase the margin.
Assume, you have a trading account with 100:1 leverage. You made a $1000 deposit. Your broker will give you $100,000 to trade and keep aside your $1,000. This thousand dollars are your margin in order to use leverage.
Margis is used by broker to open or maintain your trade position. The broker takes your margin deposit along with other traders margin deposit and make a “super margin deposit” fund. It enables the broker house to placed trades within the interbank network.
Most forex broker says, they require 0.25%, 0.50%, 1% or 2% margin. Margin is the percentage of the full amount of the position. You can calculate the maximum leverage you can have by seeing your margin requirement.
|Margin Requirement||Maximum Leverage|
Margin key terms
- Margin requirement: It is the amount of money broker will keep aside to open a trade position.
- Usable Margin: It is the available money in your trading account to open new positions.
- Used Margin: It’s the locked money to the broker to keep running the current trade position. This money will return to you when you close your trade positions or when you receive a margin call.
- Margin call: When your open position tends to suffer possible loss, and your equity goes under your used margin, then margin call occurs. In margin call your all or some of your open positions will automatically closed by the broker.