By Martin Williams
Leverage and Margin are two highly important concepts in Forex trading. No one can walk into the deep water of currency exchange trading without knowing about or using these two concepts. Today, in this article, we will delve into the definitions and crucial nooks and corners of that in a Forex trading system.
Here comes a disclaimer for all novice Forex traders in Forex trading. No one should use these tools without having any prior knowledge. This is because they are the direct entities that set the risk and profit factor in each trade. Using them whimsically and randomly will destroy a trader’s career, account, and dreams. So, before engaging with them, make sure you have profound knowledge about them.
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What is Leverage?
By the book, this refers to the ability to handle a fair share of the money, investing only a small portion of a trader’s money and borrowing the rest from the broker. For instance, to handle or book a $100K position, a broker will take only $1000 from the trading account. So, here the ratio of the deployed leverage will be 1:100. The most important thing you have to know before dealing with leverages is the aspects of winning and losing. If you win, that will be a huge winning. You get the entire amount that your leveraged position is worth.
On the opposite, if you lose, that will be a devastating loss. You have to pay the whole amount that your leveraged position is worth. So, don’t just rush. If you intend to get a clear idea, we suggest exploring the trading conditions for mutual funds. Soon, you will get an idea of why leverage is so important in trading.
What is Margin?
The concept of Margin is related to the concept of Leverage. With leverage, to handle a $100K position, a broker takes $1000 from the trader’s account. Here the leverage ratio is 1:100. The given $1,000 is called the “margin” the trader has to put as leverage. You can think of margin as the bail or faith deposit that a market participant needs to book a position with them.
The margin amount is used by the broker to sustain and maintain the market participant’s position. They merge an individual’s margin deposit with many others’ similar deposits. Eventually, the broker uses all this to place trades into the interbank network. It is typically defined as a ratio of the entire amount of the booked position. Most of them say that they require a 2%, 5%, or 25% margin. But it greatly depends on your broker.
Depending on the margin needed by the broker, a person can estimate the maximum leverage amount he can use with his trading account. If the broker needs a 2% margin, the trader will have a leverage of 50:1. Other than this margin requirement, one will probably see some other margin-related terms in his trading platform. Confusion is always in people’s minds about different margin-related terms. So, let’s get some clear insight into it and enhance our knowledge.
This is one of the easiest terms to understand because we mentioned it earlier. This requirement is the amount of capital the broker needs to book a position from an individual. To express them, people use percentages.
Account Balance: This term is synonymous with your trading bankroll. It is the total amount of cash you have in your trading account.
Used Margin: This is the amount of money that a broker uses to lock up and keep their current position open. As long as this is his, he cannot use it until his broker returns it to him.
Usable Margin: This is the portion of money in a trader’s account that is available to use to open more positions.
Margin Call: This is the amount of money you receive when their account loses the capability to cover any more loss.
So, these are all the basic information you need to know about leverage and margin. To further educate yourself about these ideas, concentrate on each related term while learning.
(Disclaimer: The article is sponsored and hence, promotes some commercial links.)