Trade Forex Trading

Best Leverage for Standard Account - Leverage and Margin Trading Explanation & Example

Forex Leverage & Margin Example Explained

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

Equity : It is total amount of capital you've got in your account.

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

In other terms, because your broker has opened up a position for you using capital you've borrowed, you must maintain this usable margin for your account as a collateral to allow you to continue using this leverage the broker has issued to you.

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

However, if you over use leverage, this free margin will drop below a certain % at which your broker will have and be forced to liquidate all of your trade positions mechanically/automatically, leaving you with a large loss. Broker at this point closes all your trade because if your trades were to be left open they would lose the money you've borrowed from them.

This is why you should always make sure you've got a lot of free margin. To do this as a trader never trade more than 5 percentage of your forex account, in fact two percentage is recommended.

Difference Between Trading Leverage Set by the Broker & Used Leverage

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

Example:

You have $10,000 (Equity)

Set 100:1

Leverage Used = Amount used /Equity

1 Contract, 1 Standard Lot

If you buy one standard lot which is equal to 100,000 dollars you'll have used

= 100,000/10,000

= 10:1

0.5 Contract, $50,000 Standard Lot

If you buy one 0.5 lots which is equivalent to $50,000 dollars you'll have used

= 50,000/10,000

= 5:1 leverage

0.2 Contract, $20,000 Standard Lot

If you buy one 0.2 lots which is equal to $20,000 dollars you'll have used

= 20,000/10,000

= 2:1 leverage

In these three cases you as a trader can see that although the set max 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 principles it's even recommended that traders use than this?

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

In fx trading the security is known 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 in your account and use trading leverage ratio 100:1 & buy 1 standard lot for $100,000 dollars - your margin on this transaction is the $1,000 dollars in your forex Standard account, this margin is the money that you will lose if your open trade moves against you - the other $99,000 dollars that is borrowed, the broker will close-out the open trade positions mechanically/automatically once your $1,000 dollars has been taken out by market.

But this is if your forex broker has set 0 % Margin Requirements before closing out your trade positions automatically.

For 20 percent margin requirement before liquidating your trade positions automatically/mechanically, then your trading transactions will be closed once your account trading balance gets to $200

For 50 % margin requirement of this level before liquidating your trade positions mechanically/automatically, then your trading transactions will be closed once your account trading balance gets to $500

If your broker sets 100% margin percentage level requirement level before and prior to automatically closing your open trade transactions, then your open trade positions will be automatically closed once your account balance gets to $1,000: Meaning that the trade transaction will be closed out as soon as you open it because even if you pay 1 pips spreads your trading account balance will get to $990 and the needed % is 100% i.e. $1,000 dollars, henceforth your trade orders will immediately get liquidated.

Most brokers do not set 100 Percent requirement, but there are those online brokers who set 100% aren't suitable for you at all, select those set 50 % or 20 percent margin requirements, in fact, those brokers who set it at 20 % are among the best since due to and because of the likely-hood they close your trade is reduced like as displayed and shown in the above illustration.

To know about this margin level which is calculated by your MT4 automatically - the MetaTrader 4 Platform will show this as "Margin Requirement", This will be displayed & illustrated as a % the higher the % the less likely your trade positions are to get closed.

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

Using 100:1 leverage

If leverage is 100:1 & you trade 1 Standard Lot, equals to $100,000

$100,000(Standard lots) divided by 100:1, your used funds is $1000 dollars

Calculation:

= Capital Used * Percentage

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

Margin Requirement = 100%

Investor and Trader has 80% above required margin level amount

Using 10:1

If leverage is 10:1 and you transact 0.1 Standard Lots, equals to $10,000

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

Calculation:

= Capital Used * Percent(100)

= $1,000/$100 * Percentage

Margin Requirement = 1000 %

Investor and Trader has 980% above required margin level amount

Using 1:1 leverage

If leverage is 1:1 and you transact 0.01 Standard Lot, equals to $1,000 dollars

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

Calculation:

= Capital Used * Percentage

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

Margin Requirement = 10,000%

Investor and Trader has 9800% above required margin trading level amount

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

These Margin Levels are Shown in the MetaTrader 4 Screen Shot Below as an Example:

Forex Leverage and Margin for Standard Account Explained - Leverage and Margin Trading Explanation & Example

MT4 Software Margin and Free Margin - Leverage and Margin for Standard Account Explained

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