Leverage and Margin

Intellectual Enterprises

Basic & Professional Forex Course

UNDERSTANDING LEVERAGE  &  MARGIN ??

LEVERAGE

It is the ability to increase purchasing power in the market without it , and  trader would need to front $100,000 in order to control 1 mere standard contract in FX. The trader need only to provide a portion of the contract value, while the rest of the contract is provided by the broker or bank Traders can trade up to 50:1* leverage, which means the trader would only need to provide $2,000 in order to control the same 1 standard contract (valued at $100,000). Remember, the higher the leverage, the higher the risk.

either standard or mini lot sizes. As mentioned before, a standard lot is $100,000. A mini lot is essentially 10% the size of a standard lot, with 1 contract being valued at $10,000 - thus requiring only $200 in margin.

Traders always have the option of choosing a lower level of leverage. Doing so may help manage risk, but bear in mind that a lower level of leverage will mean that a larger margin deposit will be needed in order to control the same size contracts.

The amount of margin required to place a trade can be calculated using the following formula:

Margin = (Contract size / Leverage)

Traders can also take advantage of fractional lot sizes, which allow a trader to trade less than 1 lot, as low as 0.01 of a lot. A mini contract size of 0.01 would be a contract valued at $100, requiring only $2 in margin. These fractional lot sizes really allow traders to trade almost any contract size!