Brief Explanation of Leverage and Margin

Brief Explanation of Leverage and Margin

Previously we have discussed leverage and margins in forex trading and on this occasion we will discuss it again. Why? because this is a topic that is very important to always be considered by every forex trader in running his business.
The definition of own leverage is the ability to control big power (big capital) with small power (small capital) and if we still remember physics lessons about leverage, then you must be very familiar with what is meant by leverage itself.
For example, to control the trading position of $ 100,000, the broker will only ask for capital of $ 1000 from our account. So that if expressed into a ratio, the amount of leverage the broker gives us is 100: 1.
And let’s say that the trading position then increases from the original $ 100,000 to $ 101,000 then we can say that we recorded a profit of $ 1000.
If you trade forex without using leverage (1: 1) then you book a profit of 1% because your capital is $ 100,000 ($ 1000 / $ 100,000).
But if your capital is $ 1000 and using 100: 1 leverage then you are able to book a profit of 100% ($ 1000 / $ 1000). Very tempting right 🙂
But what if it turns out you experienced a loss in the trading for $ 1000?
If you do not use leverage in trading your loss is -1% but what if you use 100: 1 leverage?
You will experience a loss of -100%! Bankrupt or not!
So, be careful using leverage before deciding to open a trading position or please read the article about the reason why many novice forex traders fail first to understand what we mean.
Now what is called MaRgin ???
Okay, let’s go back to the trading example above,
When we trade a position of $ 100,000 and we use 100: 1 leverage, the funds needed to control it are $ 1000.
The required capital to be deposited with the broker for the amount of $ 1000 is what is called “Margin”.
So, Margin is the amount of capital that you must give to the broker to open a trading position .
Then the margin will be used by your broker to control the trading position that you open. And the margin will usually be collected into one with the margin of another trader and will become a “Super Margin Deposit” to be used to trade with the interbank network in the world.
And margins are usually expressed as a percentage of the number of positions that we are opening. Brokers usually say a margin of 2%, 1%, 0.5%, or 0.25% is needed.
So, if your broker needs a margin of 2%, we are using a leverage of 50: 1 (1/50 x 100%).

When you open a trading account, you will find several terms about the word ” Margin “, which among others is

Margin Required , this is the amount of capital needed by the broker to open your trading position. This margin that we discussed earlier above. And usually expressed in percentage units.

Account Margin , this is the total amount of capital you have in a trading account.

Used Margin , is a number of capital locked up by your broker as a guarantee that your trading position is always open. Even though this capital is still yours but your broker will not give it to you until your trading position is closed or exposed to a margin call. So don’t forget to apply risk management so you don’t get margin calls.

Usable Margin , is the amount of capital in a trading account that is still available for you to use to open a new trading position.

Margin Call , is your trading condition that will be forcibly closed by the broker because your capital is not able to control the possibility of losses. This condition will occur if your equity is below the used margin.

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