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Wednesday, 12 February 2020

What is Margin and Leverage in Forex trading


Leverage and margin in Forex trading explained by Cameroon Online School of Forex.

Margin and leverage are not intuitively understandable terms for new traders. Let’s figure out what they are - once and for all. 💹💰

•        Leverage

What is it?
Leverage is borrowed funds used for trading. You get it from your broker.

Why do I need it?
Leverage allows you to trade with more money than you actually have on your account. People use it because the sizes of lots on Forex are quite big: the min position size is 0.01 lot, which is 1000 EUR for the EUR/USD pair. Leverage allows you to get in without investing that much.

Leverage size
Different brokers offer different leverage. At FBS, it goes up to 1:3,000. The most common leverage among Forex traders is 1:100.

Example
- You want to trade 1 lot in USD/CAD.
- Instead of investing $100,000 (1 standard lot), you invest only $100 with a 1:1000 leverage. Your broker provides the remaining $99,900 to help you open the trade.

Risks
Note that each pip the price moves against you will bring you a bigger loss the bigger the leverage you are using. Be careful and choose a reasonable leverage size.

•        Margin

What is it?
Margin is an amount of money you need to have on your account to open and maintain a leveraged trade.

Why do I need it?
Brokers need to protect themselves if they allow traders to borrow so much money from them. This is why they require traders to fund their accounts with a certain amount.

Margin size
Margin size depends on how many lots you want to trade and on the leverage you chose. The bigger the leverage, the smaller the margin.

Example
When we explained leverage, we showed you the situation where to control $100,000 with $100 you need 1:1000 leverage. In this example, $100 is what is called “margin”.

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