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Forex Margin and Leverage

The foreign exchange market has several unique characteristics that attract investors, and the trading margin is one of them. Trading with margin simply means that the dealer is “borrowing” money from the broker in order to be able to buy more currency than the resources he has. 

Leverage is the use of margin to increase the potential return on investment. Let’s take an example. The dealer has $ 10,000 in the brokerage account. However, he hopes to be able to trade $ 100,000, which is more than 10 times the funds deposited in the account (the money that investors don’t have).

 Your broker will lend you the full amount, which means that the investor can control $ 100,000, but only $ 10,000. In terms of margin, 10% is used and, in terms of leverage, a ratio of 10: 1 is used.

Example of leverage:

Why 10: 1? 10 times 10,000 is equal to 100,000, which is the amount borrowed. Why is it 10%? 10,000 USD (the amount in the merchant’s account) is equal to 10% of the total amount used in the transaction (100,000 USD).

 When you start looking for a foreign broker for foreign exchange transactions, you will always realize that the broker has the maximum leverage allowed. Most brokers allow you to leverage 100: 1, but some up to 500: 1. As Archimedes said: Give me a support and a lever, and I will move the earth.

Caution:

Buying and selling with borrowed money can be very dangerous because the gains and losses will be increased. In other words, despite the potential for greater profits, there is also the potential for greater losses. So be very careful! 

The high leverage provided to most users of various online trading platforms is the main advantage of FOREX. But it is important not to forget that, in the end, each investor can choose their own level of leverage. 

Although it is considered a tool to increase risk, leverage is still very necessary in the foreign exchange market, because under normal circumstances, the daily variation in currency prices will not exceed 1%.

 The best way to deal with the risks associated with margin trading is to follow trading methods based on “limit” and “stop loss” orders and not get carried away by emotion when you lose or win.

The high leverage available in foreign exchange transactions is not good for you or for you. High leverage can lead to huge profits or huge losses. It just depends on you, your academic qualifications, your knowledge and disciplines.

Foreign exchange market transactions are carried out in accordance with the trading margin principle. This means that the broker gives you the opportunity to work for a much greater amount than your deposit (your own funds, as a guarantee).

 This in turn means that even if the currency quote changes slightly, the revenue generated by this transaction can be similar to the trader’s own margin. Therefore, the high profitability of currency and foreign exchange businesses is highly attractive to private investors who have no capital.

Let’s understand in more detail how to implement the commercial margin.

 

Its principles include leveraging the broker (broker) over the trader (distributor). To start trading, traders deposit their own money into an account, which is called a margin. This deposit must not be less than a certain percentage of the size of the transaction you intend to make. 

Therefore, when a trader wishes to make a transaction, the broker will assess how many times the value of the transaction corresponds to the trader’s funds in the account. If the transaction amount related to your own deposit reaches maximum leverage, the broker will provide its own funds for the transaction, and the trader’s funds will serve as collateral for the transaction.

EXAMPLE:

 

Suppose the dealer’s capital is $ 1,000.00. The trader decides to make a purchase transaction of $ 40,000.00 for Japanese yen. If the maximum leverage provided by your broker is 1: 100, the leverage in this case is 1000/40000 = 1:40. The trader’s net assets during the transaction act as a guarantee for the insurer, and the trader guarantees the funds of the transaction to the broker. 

If a trader carries out an unsuccessful exchange transaction and loses part of the funds available for the broker’s trading, his compensation will automatically come from the trader’s margin. As a result, the broker’s resources remain at the same level as before the transaction, and the broker’s deposit is reduced. If the loss is so great that the broker deducts all funds from the margin to pay the compensation, the broker will not be able to make new investments. Therefore, in an unsuccessful transaction, the trader can only lose his own capital under any circumstances, without running the risk of becoming a broker’s debtor.

When the transaction is profitable, the situation is different, as all the broker’s resources have been reserved and returned to the broker by the broker, so naturally there will be no discount on your deposit. Therefore, all profits obtained will be transferred to the trader’s account, thereby increasing your deposit. The trader can withdraw the money or leave it in the account for future transactions. In the latter case, he has the opportunity to increase the scale of the business and increase revenue.



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Mick

Mick

Mick is Editor in Chief and writer here on 361forex. I have been involved with the financial market for over 10 years as a self-taught professional trader and financial manager. Other features he loves to ride his bike on weekends, loves movies and going out with friends.

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