Forex trading is also known as “MARGIN” trading or “LEVERAGED” trading. Leverage is a multiplication factor provided by the broker/market maker to allow the trader to be able to control a relatively large position in the market with a smaller financial risk to himself. Typically leverage can range from 1:10 to 1:500, most common is 1:200 for currency trades however, if the trades are of higher “VOLUME” the leverage will drop, meaning the trader will be required, by the broker, to have a higher margin in his account to cover his open positions. Traders should be aware that leverage is your best friend when the market is moving in your direction, it’s also your worst enemy when the market turns against you.
“VOLUME” is the financial size of your position in the market, not the funds required to trade. For the purposes of talking “in” the financial markets;
1 lot = 100,000 = @ 200:1 = $500 risk to client
1 mini lot = 10,000 = @ 200:1 = $50 risk to client
1 micro lot = 1,000= @ 200:1 = $5 risk to client
Before you trade with any broker check to see what their definition of a “lot” is, some actually call 1 lot 5,000.
Leverage and Margin requirements
10:1 = 10%
25:1 = 4 %
50:1 = 2 %
100:1 = 1 %
200:1 = 0.5 %
400:1 = 0.25 %
For any other % simply divide, 100/leverage, to give your margin requirement.
“MARGIN” is the actual amount of collateral required by the broker to allow the trader to open a position.
1lot = 100,000 units in the market
At 1:200 leverage = 100,000/200 = 500
So to open a $100,000 position the trader has a financial risk of $500
1mini lot = 10,000 units in the market
At 1:200 leverage = 10,000/200 = 50
So to open a $10,000 position the trader has a financial risk of $50
1micro lot = 1,000 units in the market
At 1:200 leverage = 1,000/200 = 5
So to open a $1,000 position the trader has a financial risk of $5
Higher volume trades will require more “margin” by the broker, this will vary from broker to broker. Typical thresholds may be:
Trades up to 1,000,000 Volume = 1:200
Above 1,000,000 to 3,000,000 = 1:100
Above 3,000,000 = 1:50
The margin requirement of 1,400,000 USD/JPY position
1,000,000 has a 0.5% margin requirement (200:1 leverage) which equals: $5,000
400,000 has a 1% margin requirement (100:1 leverage) which equals: $4,000
Total ($5,000+$4,000) = $9,000
Some brokers have now changed the way they calculate the “Margin” requirements to open a position.
Buy 1.0 Lot EURUSD at 1.3000
Margin Requirement for EURUSD: 0.5% (200:1)
Margin Usage would be = 100,000 x 1.3000 x 0.5% = $650
Under current settings, when a Hedged Sell 1.0 Lot EURUSD was entered, the Used Margin would drop to $0.
In the new setting, the Used Margin will remain at $650.
Buy 5000 EURUSD at 1.3000
Currently, this position requires a minimum $25 Margin Requirement (regardless of the price of the EURUSD).
Under some systems, Margin will be calculated based on current dollar value of the position.
5000 X 1.3000/200 = $32.5
It is very important to check the “MARGIN” requirements required to open a position with your Broker/Market Maker before you begin to trade. If you do not, you may find that your positions have been closed by your Broker because insufficient funds are in your account to support your open positions.