Monday, May 17, 2021

Margin and Leverage – How Are They Related?


Leverage trading can be used in increasing the trader’s buying power. With leverage, you will only have to pay a fraction of the funds that you normally pay to get a larger position. To put it simply, instead of paying the full amount to open the position, you only have to pay a percentage, also referred to as ‘initial margin’.

Leverage Trading

Trading on leverage is known to be so beneficial but it also mirrors losses the same as it mirrors the gains. In fact, its risk could even blow up your entire investment including the capital amount that you’ve invested, especially if you are a retail trader and still new to the market. There are also times when you’ll lose your initial deposit and you will have to deposit again to cover the amount you’ve lost.

To say it simply, the margin is known to be the amount in which you have to secure to be able to open a position. The margin rate will depend on the broker’s margin requirement. As for the rate, it will all be based on the trading instrument, the liquidity, and the volatility of the market.

Market volatility refers to the market’s potential moves in a particular market. Just like margin and leverage, volatility is also often linked to liquidity. For instance, the major currencies in the market namely; Euro, US Dollar, the Japanese Yen, and British Pound, accumulate millions of trades per day, the reason why they are considered the most liquid currencies.

Leverage Ratio

There are different margin requirements and leverage ratios in every broker. The leverage ratio can be 100:1, 50:1, and 200:1. Depending on the trade size, the leverage being offered per position is different. For the 200:1 leverage ratio, you will have a margin requirement of 0.5%. For a 100:1 leverage ratio, the margin requirement will be 1%.

Being new to trading on leverage, you must thoroughly understand two things, the relationship between leverage and margin. If you also want to get familiar with trading but don’t want to take a lot of risks, you practice trading in a demo account which is mostly offered for free by brokers. Leverage trading opens up more potential gains in the market.

Understanding Margin Call

When a trader is on it, he will not be allowed to acquire additional risks and the trading account will be placed at risk of stop-out. One can reach a margin call if the equity goes equal to the margin requirement. Moreover, you can reach a stop-out level if the equity goes equal with half of the required margin. This will result in the biggest losing position closing down forcibly. When this happens, all your open positions will be closed automatically. This rule is applicable to each trading account of the investor.

It is important to remember that when you receive a margin call, you must close all your open positions. Another thing you can do is to deposit more funds into your account so your equity will be increased as well. You can also reduce your position size to avoid further distractions in your account.


Author: verified_user