Leverage and Margin

Leverage

Most Forex companies provide traders with leverage. The common leverage amount is 1:200.

Leverage allows traders to use more money than they have, in order to invest in the

Forex market. The availability of leverage allows traders to make large investments without investing big amounts of money in the market. The use of leverage increases the opportunity to take bigger profits, but on the other hand also to rack up bigger losses.

It is very important to mention that a trader cannot loss the leverage money, so if a trader deposits $1000 to a forex account and he gets 1:200 leverage he can still only lose $1000 and not a penny more.

 

Margin

The amount of leverage a broker provides to his traders defines the amount of margin that this trader will have to commit in order to take a position in the market. For example, when the leverage is 1:100 the “1” in the leverage ratio signifies the amount of capital the trader has invested of his own money, which is also known as the margin.

When a trader is using a margin account, he is basically borrowing money in order to increase the possible return of investment. The margin is used in order to control a larger position than the amount he otherwise is able to control with his own invested capital.

The margin requirement allows the trader to hold a position much larger than the account value that he holds.

In the event that funds in the account will fall below the margin requirements the broker will close some or all open positions in order to prevent trader’s accounts from falling into a negative balance.

The broker is basically using the capital that the trader has deposited as security. If the trader’s position worsens and his losses approach his account value, the broker may initiate a margin call. This means that the broker will usually instruct the trader to deposit more money into the account or to close out the position to limit the risk to both parties.

It is always very important for the trader to trade according to his margin. You can read more about it in trading strategies.

 

About admin