Difference Between Maximum Leverage Set by the Broker and Used Leverage
If the set leverage is 100: 1, it means that you can borrow up to $100 dollars for each 1 dollar which you have in your account but you do not have to borrow all the $100 for every $1 you've, but you can decide to borrow 50:1 or 20:1. In this case even though the leverage option set 100:1 your used leverage will be 50:1 or 20:1 that you have borrowed to open a trade transaction.
Example:
You have $1000 (Equity)
Set 100:1
Leverage Used = Amount used /Equity
1 Contract, $100,000 Lot
If you buy one standard lot which is equal to 100,000 dollars you will have used
= 100,000/1000
= 100:1
0.5 Contract, $50,000 Mini Lot
If you buy one 0.5 lots which is equivalent to 50,000 dollars you'll have used
= 50,000/1000
= 50:1
0.2 Contract, $20,000 Mini Lot
If you buy one 0.2 lots which is equal to 20,000 dollars you will have used
= 20,000/1000
= 20:1
0.2 Contract, $10,000 Mini Lot
If you buy one 0.1 lots which is equivalent to 10,000 dollars you'll have used
= 10,000/1000
= 10:1
In these 3 cases you can see that although the set is 100:1
The used leverage is 100:1, 50:1, 20:1 & 10:1 depending on the position size of lots traded.
So Why not Just Select 10:1 trading leverage ratio as the Maximum Leverage? Because to keep within the proper money management rules it's even advised that traders use less 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 must maintain security or collateral to acquire a loan, even if the security is based on the monthly deduction from your salary, same thing with Trading.
In trading the collateral is referred to as margin. This is equity you deposit with your online broker.
This is calculated in real-time as you trade. To keep your borrowed amount you must preserve what is known as the required capital (your deposit).
Now if Your Leverage is 100:1
When trading if you have $1,000 dollars and use leverage ratio 100:1 & buy one standard contract for $100,000 your margin on this transaction is $1000 dollars in your trading account, this is money which you'll lose if your open trade position moves against you the other $99,000 that's borrowed, they will close out the open trades automatically once your $1,000 dollars has been taken by the market.
But this is if your online broker has set 0% Margin Requirement before liquidating your trades automatically.
For 20 % prerequisite before closing your transactions automatically, then your trades will be stopped out once your trading account balance reaches $200
For 50% requisite of this level before stopping out your positions automatically, then your trades will be stopped out once your trading account balance reaches $500
If they set 100% prerequisite of this level before closing out your open positions automatically, then your trade will be closed once your account balance gets to $1,000: Meaning trade will close-out as soon as you execute it because even if you pay 1 pip spread your trading account balance will get to $990 & needed percent is 100% i.e. $1,000, therefore your orders will immediately be closed.
Most online brokers don't set 100% requirement, but there are those who set 100% aren't suitable for you at all, select those set 50 % or 20 percent margin requirements, in fact, the brokers that set it at 20% are some of the best because the likelihood they close out your trade position is reduced as shown in above example.
To know about this level which is calculated by your platform automatically - the MT4 Platform Software will display this as "Margin Requirement", This will be displayed as a percentage the higher the percentage the less likely your positions are to get closed out.
For Example if
Using 100:1
If leverage option is 100:1 and you trade 1 Mini Lot, equals to $10,000 dollars
$10,000(mini lot) divide by 100:1, your used capital is $100 dollars
Calculation:
= Capital Used * Percentage(100)
= $1,000/$100 * Percentage(100)
Margin Requirement = 1,000 %
Investor has 980% above the required sum
Using 10:1
If leverage is 10:1 & you transact 1 Mini Lot, equals to $10,000 dollars
$10,000(mini lot) divide by 10:1, your used capital is $1000 dollars
Calculation:
= Capital Used * Percentage(100)
= $1,000/$1000 * Percent(100)
Margin Requirement = 100 %
Investor has 80% above requirement amount
Because when a trader has a higher leverage means that they have more percent above what's required(A.K.A. More "Free Margin") their open transactions are less likely to get closed. This is reason why traders will select option 100:1 for their account but according to their risk management rules, they won't trade above 5:1 leverage ratio.
These Zones are Shown on the Platform Screenshot Below as an Example:
Meta Trader 4 Platform Software
