Leverage Example and Margin Example and Examples

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

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

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

In other terms, because your broker has opened up a trade transaction for you using the trading capital you've borrowed, you must maintain this usable margin for your account as a collateral so as to allow you to continue using this trading Leverage Example he has given you.

Free margin : amount in your account that you can use to open new trades. This is amount of money in your account which hasn't yet been Leverage Examples because you've not yet opened a trade transaction using this money - this money is also very important for you as a investor because it enables you as a trader to continue holding your open trades as explained below.

However, if you over use stocks trading Leverage Example, this free trading margin will go below a certain % at which your broker will have to close all your trades automatically, leaving you with a big loss. The broker at this point automatically closes all your open trade position because if your trade positions are left open the broker would lose the money you'll have borrowed from them.

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

Difference Between Leverage Example Set by the Broker and Used Leverage Example

If the set stocks trading Leverage Example is 100: 1, it means that you can borrow up to 100 dollars for every dollar that you have in your account but you don't have to borrow all the $100 for every dollar you have, but you can decide to borrow 50:1 or 20:1. In this case even though the trading leverage option set 100:1 your used stocks trading Leverage Example will be the 50:1 or 20:1 that you have borrowed to make a trade position.

Example:

You have $1000 (Equity)

Set 100:1

Leverage Example Used = Amount used /Equity

If you buy lots equal to $100,000 you'll have used

= 100,000/1000

= 100:1

If you buy lots equal to 50,000 dollars that you will have used

= 50,000/1000

= 50:1

If you buy lots equal to 20,000 dollars that you will have used

= 20,000/1000

= 20:1

In these three cases you can see that allthough the set is 100:1

The used is 100:1, 50:1, 20:1 depending on the size of lots traded.

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

This question might seem straight forward but it's not, because when you trade you use borrowed money known A.K.A. Leverage Example. When you borrow capital from anyone or a bank you must maintain a security or collateral to get a loan, even if the security is based on monthly deduction from your salary, the same thing with Stocks.

In the security is known as margin. This is capital you deposit with your broker.

This is calculated in real-time as you trade. To keep your borrowed money you must maintain what is known as required capital (your deposit).

Now if Your Leverage Example is 100:1

When trading if you have $1,000 & use leverage option 100:1 & buy 1 standard lot for $100,000 your margin on this transaction is $1000 dollars in your account, this is money which you'll lose if your open trade transaction moves against you the other $99,000 that's borrowed, they will liquidate the open trades automatically once your $1,000 has been taken by the market.

But this is if your broker has set 0% Margin Requirement before liquidating your trades automatically.

For 20 percent requirement before closing your trades automatically, then your trade trades will be liquidated once your balance gets to $200

For 50 % requirement of this level before closing out your trades automatically, then your trades will be liquidated once your balance drops to $500

If they set 100% requirement of this level before liquidating your open trades automatically, then your trade position will be liquidated once your balance gets to $1,000: Meaning the trade will close-out as soon as you execute it because even if you pay 1 pip spread your account balance will go to $990 & the needed percent is 100 percent i.e. 1,000 dollars, therefore your trading orders will immediately get liquidated.

Most brokers don't set 100 Percent requirement, but there are those that set 100% are not suitable for you at all, select those set 50 percent or 20 percentage margin requirement, 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 displayed in the examples above.

To know about this level which is calculated by your software automatically - The MT4 Stocks Software will illustrate this as "Stock Margin Requirement", This will be portrayed as a % the higher the percentage the less likely your trades are to get liquidated.

For Example if

Using 100:1

If stocks trading Leverage Example is 100:1 and you transact lots equal to $10,000

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

Calculation:

= Capital Used * Percentage(100)

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

Stock Margin Requirement = 1,000 %

Investor has 980 percent above the required amount

Using 10:1

If stocks trading Leverage Example is 10:1 and you transact lots equal to $10,000

$10,000 dollars divide by 10:1, your used capital is $1000

Calculation:

= Capital Used * Percentage(100)

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

Stock Margin Requirement = 100 %

Investor has 80 % above the required amount

Because when one has a higher stocks trading Leverage Example means that they have more percent above what is required (A.K.A. Known As More "Free Margin") their open transactions are less likely to get closed. This is reason why traders will select the option 100:1 for their account but according to their risk management rules, they will not trade above 5:1 leverage ratio.

These Levels are Shown on The Software Screen-Shot Below as an Example:

MT4 Software