“Leverage” and “margin” are key definitions every trader should know.
Leverage
Leverage allows you to trade with more money than you have on your account. How much more? Different brokers offer different leverage sizes. You can check the leverage provided by FBS in the “Trading” section of the website.
For example, if you have a leverage of 1:30, you will need to provide only 3.3% of the desired trade size and the rest 96.7% will be added by the broker to make your trade work.
Why do brokers give traders leverage? Notice that the sizes of lots on Forex are quite big. The minimum position size in 0.01 lot. For EUR/USD currency pair that accounts for 1,000 euro. Not everyone will want to trade with such amounts of money, especially at the beginning. As a result, brokers provide traders with the opportunity to invest only a small part of the money to finance such a trade.
Example. You want to trade 1 lot in USD/CAD.
Situation 1. You provide $100,000 (1 standard lot) and make your trade. You don’t borrow money from the broker.
Situation 2. You can spare only $3,500. With 1:30 leverage, you will provide $3,333 your broker will provide the remaining $96,666 to help you open the trade.
You can choose the size of leverage you would like to use. The bigger the leverage, the more profit you will get from each pip the price moves in your favor. As a result, skilled traders may use bigger leverages in order to make profits faster and/or in larger quantities.
At the same time, you should always be aware that your risks also increase with leverage. If you opened a buy trade but the price is going down, each pip the price moves against you will bring you a bigger loss the bigger the leverage you are using. As a result, you should be careful and choose a reasonable leverage size. The most common leverage among Forex traders is 1:100.
Margin
You may be wondering how brokers survive if they allow traders to borrow so much money from them. The answer is that brokers are protected because of the margin. A margin is an amount of money you need to have on your account to open and maintain a leveraged trade.
When we explained leverage, we showed you the situation where to control $100,000 with $3,333 you need 1:30 leverage. In this example, $3,333 is what is called “margin”. You can see that the margin size depends on your desired trade size (i.e. how many lots you want to trade) and on the leverage you have chosen (you can specify the leverage for your account in your personal area with FBS). All in all, the bigger the leverage you use, the smaller the margin you will need to make a trade.
In your terminal “Trade” window you can see columns “Balance”, “Equity”, “Margin”, and “Free margin”. So, the margin is the amount of money you have already used: this sum finances your current open trades. The amount of money you can still use for new trades is reflected in the “Free margin” area. Your free margin will always be equal to “Equity” less “Margin”.
Brokers usually define the “margin call” level. This level represents a certain percentage of margin. If you have a losing trade and your equity falls to that level, you will get a warning from the broker that you need to close your trade or deposit more money to meet the minimum margin requirement. The trading server may also decide to close the trade.
There’s also a level called “stop out”. It comes in sight if you keep losing money in an unsuccessful trade. If your losses pull your equity to that level, then the broker will be entitled to close your trading position without any warnings.
At FBS, a margin call is at 80% and lower. It means that you'll get a margin call if your account equity drops to 80% of the margin and lower (in our example, 80% of $100 is $80). A stop out equals 50% at FBS, so your trade will be automatically closed if your equity drops to $50 (50% of the margin and lower).
The margin is needed for your broker’s security in case the market goes against your position. It’s in your interest as a trader to avoid margin calls. If you are careful and abide by the rules of risk management, you will be able to do that and trade with profit.
FBS Analyst Team
2024-06-01 • Updated
Other articles in this section
- How to start trading on Forex?
- How to open a trade in MetaTrader?
- How much money do I need for Forex trading?
- Demo accounts
- MACD (Moving Average Convergence/Divergence)
- How to determine position size?
- Transaction, profit, loss. Types of orders
- Economic calendar
- When is Forex market open?
- Calculating profits
- How to trade?
- What technical tools do I need for trading?
- The advantages of Forex market
- What is Forex?
FAQs
Using leverage of 30:1, for every US$100 you have in your account, you can place a trade worth up to US$3,000 and so on. In other words, margin is the amount of money needed to open a position, while leverage means that you can enter into positions larger than your account balance.
What is margin and leverage for dummies? ›
The sum amount invested by an individual, including the collateral provided is called the margin, and this practice develops a trading power called leverage. Margin is majorly used to gain and generate high leverage that has the ability to increase both profit and losses.
What is a leverage in trading? ›
Leverage Meaning in Share Market
In its most primary form, leverage trading is any type of trading that includes borrowing money or otherwise raising the number of shares involved in a deal beyond the amount of what you can afford if you paid in cash.
Is leverage better than margin? ›
According to experts, leveraging your trades cautiously over a long period could be beneficial as it helps minimize losses. On the other hand, when the margin is used in short-term investments in liquid markets, it can yield greater returns.
What is a good leverage for trading? ›
The best leverage in forex markets depends on the investor. For conservative investors, or new ones, a low leverage ratio of 5:1/10:1 may be good. For seasoned investors, who are more risk-friendly, leverages may be as high as 50:1 or even 100:1 plus.
Should beginners use leverage? ›
Higher leverage ratios offer greater profit potential but also increase the risk of substantial losses. Experience and Knowledge: Consider your level of experience and knowledge in forex trading. If you're a beginner, it's advisable to start with lower leverage ratios and gradually increase as you gain expertise.
What is the best way to explain leverage? ›
Leverage is the use of borrowed money (called capital) to invest in a currency, stock, or security. The concept of leverage is very common in forex trading. By borrowing money from a broker, investors can trade larger positions in a currency.
What leverage is good for $100? ›
The best leverage for $100 forex account is 1:100.
Many professional traders also recommend this leverage ratio. If your leverage is 1:100, it means for every $1, your broker gives you $100. So if your trading balance is $100, you can trade $10,000 ($100*100).
What leverage is good for $5? ›
Generally, it's recommended to use lower leverage when you have a smaller account size to minimize the risk of significant losses. A leverage of 1:10 or 1:20 can be a good starting point for a $5 account.
Can I trade without leverage? ›
Trading without leverage of any kind with only your money exposes traders to much lower risks. The risk of losing more than the initial investment is no longer present as the trader is not using borrowed funds from the broker. Diminishing risks means lower chances of experiencing large losses.
Leverage is the strategy of using of borrowed money to increase investment power. An investor borrows money to make an investment, and the investment's gains are used to pay back the loan.
Can you lose more money with leverage? ›
As I continue to say, leveraged trading comes with significant risks because while it can increase your gains, it can also magnify your losses. If you have a low-risk tolerance or you're uncomfortable with the idea of substantial losses, leverage trading may not be suitable for you.
Do you need leverage to get rich? ›
Leverage – How To Fast-Track Your Financial Goals
Nobody gets rich without leverage. If you aren't employing leverage in your business and wealth plans, it means you're compromising the speed, time, and work effort necessary to reach each level of success.
How much leverage is good for trading? ›
If you are conservative and don't like taking many risks, or if you're still learning how to trade currencies, a lower level of leverage like 5:1 or 10:1 might be more appropriate. Trailing or limit stops provide investors with a reliable way to reduce their losses when a trade goes in the wrong direction.
What is a leverage for dummies? ›
Leverage is typically expressed as a multiplier rate (like 10 times or 20 times) or a ratio (like 10:1 or 20:1). If the leverage rate is 10-times/ratio is 10:1, for example, and you have $1,000 of available margin, you're able to hold a maximum position equal to $10,000.
What is leverage in simple words? ›
to use something that you already have in order to achieve something new or better: We can gain a market advantage by leveraging our network of partners. SMART Vocabulary: related words and phrases.
What is margin and leverage with example? ›
Using leverage of 30:1, for every US$100 you have in your account, you can place a trade worth up to US$3,000 and so on. In other words, margin is the amount of money needed to open a position, while leverage means that you can enter into positions larger than your account balance.
What is margin for beginners? ›
Generally speaking, buying on margin is not for beginners. It requires a certain amount of risk tolerance and any trade using margin needs to be closely monitored. Seeing a stock portfolio lose and gain value over time is often stressful enough for people without the added leverage.
What is margin in trading in simple words? ›
Margin is the money borrowed from a broker to purchase an investment and is the difference between the total value of an investment and the loan amount. Margin trading refers to the practice of using borrowed funds from a broker to trade a financial asset, which forms the collateral for the loan from the broker.
