Leverage | Margin

What is Leverage?

Leverage is a tool used by traders that enables them to control a large amount of capital by putting down a much smaller amount. Unlike traditional investing, where traders must tie up the full value of their position, with leveraged trading you only have to put up a smaller portion, known as margin.

In the case of 400:1 leverage, for example, you can use $1 to control $400 of a position.

Leverage has opened markets such as forex to more retail traders who don’t want to allocate large amounts of capital to each position. However, it will magnify both the profits and the losses from any trade, so it should be used with caution.

For example, to control a $100,000 position, the broker will set aside $250 from your account. Your leverage, which is expressed in ratios, is now 400:1. You’re now controlling $100,000 with $250.

What is Margin?

Margin is a percentage of the full value of a trading position that you are required to put forward in order to open your trade. Margin trading enables traders to increase their position size and exposure to the market with a smaller initial capital outlay. This means margin can be a double-edged sword as it magnifies both profits and losses, as these are based on the full value of the trade, not just the amount required to open it.

The leverage available to a trader depends on the margin requirements of the broker, or the leverage limits as stipulated by the relevant regulatory body. Margin requirements differ depending on brokers and the region your account is based in. For example, if a broker offers a margin rate of 0.25% and a trader wants to open a position worth $100,000, only $250 is required as a deposit to enter the trade. The remaining 99.75% would be provided by the broker. The leverage on the above trade is 400:1. As trade size increases, so does the amount of margin required.

Having a good understanding of margin is very important when starting out in the leveraged Forex and CFD market. It’s important to understand that trading on margin can result in larger profits, but also larger losses, therefore increasing the risk.

Difference Between Leverage and Margin

Another concept that is important to understand is the difference between leverage and margin. Margin and leverage are related, but they have different meanings. Margin is the deposit needed to place a trade and keep a position open. Leverage enables you to trade larger position sizes with a smaller capital outlay.

A leverage ratio of 400:1 means that a trader can control a trade worth 400 times their initial investment. If a trader has $5,000 available to open a trade, they can effectively control a position with a total value of $2,000,000 if the leverage ratio is 400:1. In Forex trading, leverage is related to the Forex margin rate which tells a trader what percentage of the total trade value is required to enter the trade.

Margin is usually expressed as a percentage of the full amount of the position. For example, most brokers say they require 2%, 1%, .5% or .25% margin. Based on the margin required by your broker, you can calculate the maximum leverage you can wield with your trading account.

Margin Requirement	Max Leverage
5%	20 : 1
3%	33 : 1
2%	50 : 1
1%	100 : 1
0.50%	200 : 1
0.25%	400 : 1

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