Summary on leverage:

leverage means trading a big account by only contributing little and borrowing the rest from your broker. For example you can open an account as low as $100 dollars and trade it using 10,000 units; the $9900 is lent to you by your broker.

While using a leverage to control a big position, your broker will require you to deposit a minimum amount on your account to allow you to have requested size which will act as your collateral security. That amount of money is the margin

Margin is always expressed as a percentage of full amounts of the held position. Forex margins are expressed as 2%, 1%, 0.5% or 0.25% basing on the margin required by the forex broker.

Account margin/balance.

 Total amount of money on your trading account.

Margin used:

 Amount of money locked by your broker to maintain your open position. It is only released at the close of your current position.

Free margin;

The amount of money that is not involved in any trade and can be used to open more positions.

 Equity

 Equity is the account balance plus the floating profit or loss for a running trade.

Equity = account balance +profit/loss

 When there is no current trade running, your equity is equal to the account balance and equal to free margin.

 Marginal call.

 This is a call received from your broker when the equity amount on your account is equal or below the margin level (margin) and the market is still going against you. At this point you cannot take any additional positions. You must deposit more money into the account or some of the open positions will be closed by the broker to limit the risk.

Margin level

 This is the level where a broker can determine whether you can take any more new trades or not. Most brokers use 100%. This means, at this level your equity  is equal to margin. So you will not be allowed to open any new position unless any of your running trades goes back to profits and your equity increases.

Habits that may lead to marginal calls

  • Holding on to a losing trade for long, depletes usable/free margin
  • Over leveraging your account
  • Using small capital accounts which forces you to overtrade with too little usable/free margin.

Stop-out level

When your equity falls below the margin level and reaches as low as 5%, the system starts closing your losing open trades automatically starting with the biggest losing position

Using leverage is one of the best ways to multiply your profits when trading forex especially if you have a small account. However, the same way you make big profits using leverage is the same way you stand to make big losses.

Leverage gives you great opportunities to trade any size you want but you must stand warned; anything can happen in the market and you make a big lose.

If you choose to trade using leverage, choose currencies with low spreads and don’t use a big leverage on long-term trades. Be a disciplined trader and risk only that you can afford to lose.

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