Best Leverage for Micro Account - Leverage and Margin for Micro Account Explained

Forex Leverage and Margin Explained

Margin required : It is amount of money your online broker requires from you to open a trade transaction. It is expressed in %s.

Equity : It is total sum of capital you have in your trading account.

Used margin : sum of money in your account which has been already used up when buying a currency contract, this contract is one that's displayed in open positions. As a trader you can not use this amount of money after opening a trade order transaction because you have already used it and it is not available to you.

In other words, because your broker has opened up a position for you using capital you have borrowed, you must keep this usable margin for your trading account as a security so as to allow you to continue using this leverage he has given to you.

Free margin : amount in your account that you can use to execute new trades. This is amount of money in your trading account which has not yet been leveraged because you haven't yet opened a transaction with this money - this money also is very important for you as a investor because it enables you as a trader to continue holding your open trades as will be explained below.

However, if you over use leverage, this free trading margin will go below a certain % at which your broker will have to liquidate all your trade transactions automatically, leaving you with a large loss. Broker at this point liquidates all your trade transaction because if your trades are left open they would lose the money you've borrowed from them.

This is why you should always make sure you've a lot of free margin. In order to do this as a trader never trade more than 5 percentage of your trading account, in fact 2 percentage is advised.

Difference Between Leverage Set by Broker & Used Leverage

If the set leverage is 100: 1, it means that you can borrow up to $100 dollars for every dollar that you have in your account but you do not have to borrow all the 100 dollars for every dollar you've, but you can decide to borrow 50:1 or 20:1. In this case although the leverage ratio set 100:1 your used leverage will be 50:1 or 20:1 that you have borrowed to make a trade transaction.

Example:

You have $1000 (Equity)

Set 100:1

Leverage Used = Amount used /Equity

0.1 Contract, 10 Micro Lots

If you buy one standard lot which is equivalent to 10,000 dollars you will have used

= 10,000/1000

= 10:1

0.05 Contract, $5,000 Micro Lot

If you buy one 0.05 lots which is equal to 5,000 dollars you'll have used

= 5,000/1000

= 5:1 leverage

0.02 Contract, $2,000 Mini Lot

If you buy one 0.02 lots which is equivalent to 2,000 dollars you will have used

= 2,000/1000

= 2:1 leverage

In these 3 cases you can see that even though the set maximum leverage is 100:1

The used leverage ratio is 10:1, 5:1 & 2:1 depending on the size of lots traded.

So Why not Just Choose 10:1 leverage option as the Maximum Leverage? Because to keep within the suitable risk management guidelines it is even recommended that investors use less than this?

This question may seem straight forward but it's not, because when you open trade transactions you use borrowed money known A.K.A. Leverage. When you borrow capital from anyone or a bank you must maintain security or collateral to acquire a loan, even if the security is depending on monthly deduction from your own salary, same thing with Forex Trading.

In forex trading the security is referred to as margin. This is equity you as a trader deposit with your broker.

This is calculated in real-time as you trade. To keep your borrowed amount you must maintain what is referred to as the required capital (your deposit).

Now if Your Trading Leverage is 100:1

When trading if you have $1,000 dollars and use trading leverage ratio 100:1 and buy 1 standard contract for $100,000 your margin on this trade transaction is the $1000 dollars in your forex micro account, this margin is the money that you'll lose if your open trade transaction moves against you - the other $99,000 that's borrowed, the broker will close the open trades automatically once your $1,000 has been taken out by market.

But this is if your online broker has set 0 % Margin Requirements before stopping out your trades automatically.

For 20 % margin requirement before liquidating your trades automatically, then your trades will be liquidated once your trading account balance gets to $200

For 50 % margin requirement of this level before closing out-out your trade transactions automatically, then your transactions will be stopped out once your account balance gets to $500

If your online broker sets 100% margin percent level requirement level before automatically closing your open trade positions, then your open trades will be automatically closed once your account balance gets to $1,000: Meaning that the trade will be closed out as soon as you execute it because even if you pay 1 pips spreads your account balance will get to $990 & the needed percent is 100 percent i.e. $1,000, therefore your orders will immediately get liquidated out.

Most brokers don't set 100 Percent requirement, but there are those brokers who set 100 % are not suitable for you at all, select those set 50 percent or 20 % margin requirements, in fact, those brokers that set it at 20% are some of the best because the likely-hood they close your trade position is reduced as illustrated in the above example.

To know about this margin level which is calculated by your Meta Trader 4 software automatically - the MetaTrader 4 Software will show this as "Margin Requirement", This will be displayed as a percentage the higher the percentage the less likely your trades are to get closed.

For Examples if - (using a online broker that requires 20 % margin requirement)

Using 100:1 leverage

If leverage option is 100:1 and you trade 100 Micro Lots, equals to $100,000

$100,000 dollars divide by 100:1, your used funds is $1000

Calculation:

= Capital Used * Percentage(100)

= $1,000/$1000 * Percentage(100)

Margin Requirement = 100 %

Investor has 80% above the required sum

Using 10:1

If leverage is 10:1 and you trade 10 Micro Lots, equals to $10,000

$10,000 dollars divide by 100:1, your used funds is $100

Calculation:

= Capital Used * Percentage(100)

= $1,000/$100 * Percentage(100)

Margin Requirement = 1000 %

Trader has 980% above the required sum

Using 1:1 leverage

If leverage is 1:1 and you transact 1 Micro Lot, equals to $1,000

$1,000 dollars divide by 100:1, your used capital is $10

Calculation:

= Capital Used * Percentage(100)

= $1,000/$10 * Percentage(100)

Margin Requirement = 10,000 %

Investor has 9800% above the required amount

Because when a trader has a higher leverage means that they have more margin requirement percent above what's required(A.K.A. More "Free Margin") their open forex trades are less likely to get liquidated. This is reason why traders will choose option 100:1 for their account but according to their risk management rules, they won't trade above 5:1 leverage option.

These Margin Levels are Shown in the MT4 Software Screen Shot Below as an Example:

MetaTrader 4 Platform Margin & Free Margin - Leverage and Margin for Micro Account Explained