What's Forex Leverage for Beginners? - Leverage in Forex Explain What is Margin?
The definition of Forex 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 forex market to attract many traders.
We shall explain forex leverage first & then explain forex margin in this learn how to calculate forex trading leverage & margin forex tutorial.
Forex Example:
We shall us this forex examples to explain what forex trading leverage is? If your forex broker gives you forex leverage ratio of 100:1 (this is the best option to select as the maximum forex leverage for any forex trading account)
This means you borrow 100 dollars for every dollar you have in your forex trading account.
To put in another way your forex trading broker gives you 100 dollars for every 1 dollar in your forex account. This is what's referred to as forex trading leverage.
This means if you open a forex account with $1,000 and your forex leverage ratio is 100:1, then you will get $100 for every $1 you that you've, the total amount that you will control is:
If for 1 dollar the broker gives you 100
Then if you have 1,000 in your forex account you will get a total of:
$1,000 * 100 = 100,000 dollars
Now you control 100,000 dollars of Capital after forex leverage
Most new forex traders ask what forex trading leverage is best for 2,000 dollars, or 5,000 dollars, or 10,000 dollars forex account? - The best forex leverage ratio to choose when opening a live forex account is always 100:1 & not 500:1.
What's Forex Margin?
Forex Margin is the amount of money required by your forex broker so as to allow you to continue forex trading with the borrowed amount - leveraged amount.
In other words the question what's margin in Forex? can be explained as the money required by your forex broker to cover open forex trades and is expressed as a percentage. For 100:1 leverage, the amount you will control is 100,000 dollars as explained in the forex example above.
Now can you compare an investor investing $1,000 with another investor investing $100,000? Obviously Not. This is how leverage works in forex trading, 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 referred to as Forex Leverage. This money that you borrow from your forex broker, you borrow it against the $1,000 dollar of your own money that you deposit with your forex broker in your forex account. If you were to define what this forex leverage means - then leverage is the ability to control a big amount of money using very little of your own money and borrowing the rest. Otherwise, if you were trade forex without this forex leverage it would not be as profitable as it is, in fact you can still choose not to use forex leverage, using the 1:1 leverage ratio but you would not make money it would take too long to make any forex profit.
Example of how to calculate forex trading leverage & forex trading margin:
Forex Trading Margin required in this case is 1,000 dollars (your money) if it is expressed as a percentage of 100,000 dollars in your forex trading account which you control it is:
If forex leverage ratio = 100:1
1,000 / 100,000 * 100= 1%
Forex Margin required = 1%
(1/100 *100= 1%)
"TradeForex Trading - Please simplify because I am a Forex Beginner"
(Simplify - your forex capital is $1,000 - after forex leverage you control $100,000 - $1,000 is what percent of $100,000 - it is 1%) that's your forex margin requirement for your forex trading account.
The forex trading margin example below, the set forex leverage ratio is 100:1, the forex 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 and borrowed the rest, with this leverage ratio set at 100:1, the trader is using 1% of their capital, this 1% is equivalent to $2683.07, if 1% is equal to $2683.07 then 100% is $268,307
MetaTrader 4 Transactions Panel - What is Forex Leverage for Beginners? - Do You Have to Use Leverage In Forex?
- If = 50:1 Forex Leverage Ratio
Then forex margin requirement = 1/50 *100= 2%
If you have $1,000,
1,000* 50 = $50,000.
1,000 / 50,000 * 100= 2%
(Simplify - your forex trading capital is $1,000 after forex trading leverage you control $50,000 - $1,000 is what percentage of $50,000 - it is 2%) that is your forex trading margin requirement
- If = 20:1 Forex Leverage Ratio
Then the forex margin requirement = 1/20 *100= 5%
If you have $1,000,
1,000* 20 = $20,000.
1,000 / 20,000 * 100= 5%
(Simplify - your forex trading capital is $1,000 after forex trading leverage you control $20,000 - $1,000 is what percentage of $20,000 - it is 5%) that is your trading forex margin requirement
- If = 10:1 Forex Leverage Ratio
Then the forex trading margin percent level 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 forex capital is $1,000 after forex trading leverage you control $10,000 - $1,000 is what percentage of $10,000 - it is 10%) that is your forex margin requirement
What is the Difference Between Maximum Forex Trading Leverage & Used Leverage?
However, you should note that there is a difference between maximum forex leverage (trading forex leverage given by your forex trading broker which is the highest forex leverage ratio you can trade with if you choose to) and used forex leverage (forex leverage depending on the forex lot size you have opened - open trade lots positions). One is the broker's (Maximum Leverage Ratio) and the other is forex trader's (Used Leverage Ratio). To explain this trading forex leverage concept we shall use the forex example above:
If your forex broker has given you 100:1 Maximum Leverage Ratio, but you only open 1 mini forex lot of 10,000 dollars then Used Forex Leverage is:
10,000 dollars (1 mini forex lot ): 1,000 dollars (your money)
10:1
Your have used 10:1 Forex Leverage Ratio, but your maximum leverage ratio is still 100:1 Leverage. This means that even if you are given 100:1 Maximum Forex Leverage Ratio or 500:1 Maximum Leverage Ratio, you do not have to use all of it. It is best to keep your used forex leverage ratio to a maximum of 10:1 forex leverage but you will still select 100:1 maximum forex leverage ratio for your forex trading account. The extra forex leverage will give you what we call Free Margin, As long as you have some Free margin on your forex trading account then your forex trades will not get closed by your forex trading broker because this margin requirement will remain above the required level based on the free margin in your forex account.
When it comes to forex trading - one of your rules: forex money management rules on your forex trading plan should be to use forex leverage ratio of below 5:1.
In the above forex example, the trader is using $2683.07, total controlled amount is $268,307, but forex account equity is $16,116.55, therefore used forex trading leverage is ($268,307 divide by 16,116.55) = 16.64 : 1
16.64 : 1 Used Forex Leverage Ratio
Forex margin accounts allow forex traders to control a large amount of currency using little of their own money while borrowing the rest
Obtaining this forex margin trading account will enable you to borrow money from the broker to trade forex lots with; the forex standard lots are worth $100,000.
The amount of borrowing power your margin forex account gives you what is called "leverage", and is usually expressed as a ratio - a leverage ratio of 100:1 means you can control resources worth 100 times your deposit.
What this means in forex trading terms is that with 1 % margin in your forex trading account you can control one standard forex lot or 1 forex contract worth $100,000 with a $1,000 deposit.
However, trading on this margin forex account increases both potential for forex profits as well as forex losses. In Forex trading you can never lose more than you invest, forex losses are limited to your deposits and usually forex brokers will close a forex trade transaction that extends beyond your deposit amount by executing a forex trading margin call. Forex traders must therefore try to keep their forex margin level above that required by their forex broker. By using forex money management rules & keeping your used forex leverage ratio below 5:1.
What is Forex Leverage for Beginners? - Do You Have to Use Leverage In Forex? - Leverage in Forex Trading - Forex Leverage Example - Forex Leverage & Margin Explained - Forex Leverage Calculator
