Forex Leverage and Margin Explained - What is Leverage? - What is Margin?
The definition of Leverage is having the ability to control a large amount of money using very little of your own money and borrowing the rest - this is what makes the currency market to attract many investors.
We shall explain forex leverage first and then explain forex margin in this learn how to calculate forex leverage & margin lesson.
Example:
We shall us this example to explain what forex leverage is? If your broker gives you leverage of 100:1 (this is best option to select as the maximum leverage for any forex account)
This means you borrow 100 dollars for every dollar you have in your Forex trading account.
To put in another way your forex broker gives you 100 dollars for every 1 dollar in your account. This is what's known as leverage.
This means if you open an account with $1,000 and your leverage is 100:1, then you'll get $100 for every $1 you that you have, the total amount which you'll control is:
If for 1 dollar the broker gives you 100
Then if you have 1,000 you'll get a total of:
$1,000 * 100 = 100,000 dollars
Now you control 100,000 dollars of Investment
Most new forex traders ask what leverage is best leverage for 1,000 dollars, or 2,000 dollars, or 5,000 dollars forex account? - The best leverage option to select when opening a live forex account is always 100:1 and not 400:1.
What is Forex Trading Margin?
Forex Margin is the amount of money required by your broker so that to allow you to continue trading with borrowed amount.
In other words the question what's margin in Forex? can be described as the money required to cover open currency trades & is expressed in percentage. For 100:1, the amount you will control is 100,000 dollars as explained in the above examples.
Now can you compare someone investing $1,000 with another one investing $100,000? Obviously Not. This is how it works, it takes you from that guy investing $1,000 to that one investing $100,000. Where does this extra money come from? You borrow from your forex broker in what is simply known as Leverage. This money that you borrow, you borrow it against the $1,000 dollar of your own money that you deposit with your forex broker. If you were to explain what this leverage means - then it's the ability to control a big amount of money using very little of your own money & borrowing the rest. Otherwise, if you were trade Forex without this leverage it would not be as profitable as it is, in fact you can still select not to use leverage, using the 1:1 option but you would not make money it would take too long to make any profit.
Example of how to calculate leverage & margin:
Forex Margin required in this case is 1,000 dollars (your money) if it is expressed as a percent of 100,000 dollars in your forex account which you control it is:
If leverage = 100:1
1,000 / 100,000 * 100= 1%
Margin required = 1%
(1/100 *100= 1%)
"TradeForex Trading - Please simplify because I am Beginner'
(Simplify - your capital is $1,000 after leverage you control $100,000 - $1,000 is what percent of $100,000 - it's 1%) that is your margin requirement for your forex account.
The forex margin example below, the set leverage is 100:1, the margin which is 1% is $2683.07, therefore the total amount controlled by forex trader is: $268,307 - this is because with this leverage the trader has used little of his money & borrowed the rest, with this set at 100:1, the trader is using 1 % of their capital, this 1% is equal to $2683.07, if 1% is equal to $2683.07 then 100% is $268,307
MetaTrader 4 Transactions Panel - Forex Leverage and Margin Explained
- If = 50:1 Leverage
Then margin requirement = 1/50 *100= 2 %
If you have $1,000,
1,000* 50 = $50,000.
1,000 / 50,000 * 100= 2%
(Simplify - your capital is $1,000 after leverage you control $50,000 - $1,000 is what percentage of $50,000 - it is 2%) that is your forex margin requirement
- If = 20:1 Leverage
Then the requirement = 1/20 *100= 5%
If you have $1,000,
1,000* 20 = $20,000.
1,000 / 20,000 * 100= 5%
(Simplify - your trading capital is $1,000 after leverage you control $20,000 - $1,000 is what percentage of $20,000 - it is 5%) that is your forex margin requirement
- If = 10:1 Leverage
Then the requirement is = 1/10 *100= 10%
If you have $1,000,
1,000* 10 = $10,000.
1,000 / 10,000 * 100= 10%
(Simplify - your trading capital is $1,000 after leverage you control $10,000 - $1,000 is what percentage of $10,000 - it is 10%) that is your forex margin requirement
What's Difference Between Maximum FX Trading Leverage & Used Forex Trading Leverage?
However, you should note that there is a difference between maximum leverage (leverage given by your forex trading broker which is the highest leverage you can trade with if you choose to) and used leverage (leverage depending on the lots you have opened/open trades). One is the broker's (Maximum Leverage) & the other is trader's (Used Leverage). To explain this leverage concept we shall use the example above:
If your forex broker has given you 100:1 Maximum Leverage, but you only open 1 mini lot of 10,000 dollars then Used Leverage is:
10,000 dollars (1 mini lot ): 1,000 dollars (your money)
10:1
Your have used 10:1 Leverage, but your maximum is still 100:1 Leverage. This means that even if you're given 100:1 Maximum Leverage or 400:1 Maximum Leverage, you do not have to use all of it. It is best to keep your used leverage to a maximum of 10:1 but you will still choose 100:1 maximum leverage option for your trading account. The extra leverage will give you what we call Free Margin, As long as you have some Free margin on your forex trading account then your trades will not get closed by your forex trading broker because this margin requirement will remain above the required level.
When it comes to forex trading currencies one of your rules: money management rules on your trading plan should be to use leverage below 5:1.
In the above image example, the trader is using $2683.07, total controlled amount is $268,307, but account equity is $16,116.55, therefore used leverage is ($268,307 divide by 16,116.55) = 16.64 : 1
16.64 : 1 Used Leverage
Forex Margin accounts allows traders to control a large amount of currency using little of their own while borrowing the rest
Obtaining this forex trading account will enable you to borrow money from the broker to trade forex lots with; the lots are worth $100,000.
The amount of borrowing power your trading account gives you what is called 'leverage', and is usually expressed as a ratio - a ratio of 100:1 means you can control resources worth 100 times your deposit.
What this means in Forex terms is that with 1% margin in your forex trading account you can control one standard lot/1 contract worth $100,000 with a $1,000 deposit.
However, Trading this account increases both potential for profits as well as losses. In Forex you can never lose more than you invest, losses are limited to your deposits and usually brokers will close a transaction that extends beyond your deposit amount by executing a margin call. Traders must therefore try to keep their margin level above that required. By using money management rules & keeping your used leverage below 5:1.
