One of the main attractions of foreign exchange trading is leverage and margin.
What is leverage and margin?
One of the main attractions of foreign exchange trading is leverage and margin. It allows you to open and maintain larger positions with a small amount of money. For example, if you want to open a $100000 euro to dollar transaction, you don’t have to have $100000 in your account!
What is Margin ?
It may be easier to understand if you think of the margin as a deposit for the trade that you want to open and maintain. The broker that you’re trading with will keep a portion of your balance to cover the potential loss of that trade. Once you close the position, the margin will be put back into your account.
The margin that you need for a trade is normally expressed as a percentage of the whole trade and is called the ‘Margin requirement’. You’ll be given a margin requirement for every trade that you open, and it will vary depending on the instrument that you trade and the broker that you choose to trade with.
What is leverage?
Theoretically speaking, leverage refers to the fact that traders have a large amount of disposable funds while using a small amount of their own funds. They can borrow the rest from their agents.
For example, if you trade with 1:100 leverage and you have $1000 in your account, you have $100000 to trade. While this sounds like a great opportunity, you must always remember that it’s a double-edged sword.
When you trade at a larger amount, you can open a larger position and possibly make a larger profit due to leverage. However, the larger your position, the higher your risk and the greater your loss.
How do you calculate the margin requirement?
Well, the required margin will be a percentage of the size of the trade that you want to open and is calculated according to the base currency of the pair that you want to trade. Using the equation below you can work out how much margin you’ll need for each trade.
Required Margin = Position Size X Margin Requirement
For example: You’d like to open a mini lot (10,000 base units) in USDJPY. How much margin do you need to open the position?
As the USD is the base currency, the position size (or notional value) is 10,000 USD. Your broker has given you a Margin Requirement of 5%.
Risk statement
| Instrument | Pip Value (1 lot) | Standard Size (1 lot) | Margin Requirement % | Minimum Leverage | Maximum Leverage |
| AUDCAD | 10 CAD | 100,000 AUD | 0.2 | 1:1 | 1:500 |
| AUDCHF | 10 CHF | 100,000 AUD | 0.2 | 1:1 | 1:500 |
| AUDJPY | 1,000 JPY | 100,000 AUD | 0.2 | 1:1 | 1:500 |
| AUDNZD | 10 NZD | 100,000 AUD | 0.2 | 1:1 | 1:500 |
| AUDUSD | 10 USD | 100,000 AUD | 0.2 | 1:1 | 1:500 |
| CADCHF | 10 CHF | 100,000 AUD | 0.2 | 1:1 | 1:500 |
| CADJPY | 1,000 JPY | 100,000 AUD | 0.2 | 1:1 | 1:500 |
| CHFJPY | 1,000 JPY | 100,000 CHF | 0.2 | 1:1 | 1:500 |
| EURAUD | 10 AUD | 100,000 EUR | 0.2 | 1:1 | 1:500 |
| EURCAD | 10 CAD | 100,000 EUR | 0.2 | 1:1 | 1:500 |
| Instrument | Pip Value (1 lot) | Standard Size (1 lot) | Margin Requirement % | Minimum Leverage | Maximum Leverage |
| AFRICA40 | 1 | 1 | 1 | 1:1 | 1:100 |
| AUS200 | 1 | 1 | 1 | 1:1 | 1:100 |
| DE30 | 1 | 1 | 1 | 1:1 | 1:100 |
| FRANCE40 | 1 | 1 | 1 | 1:1 | 1:100 |
| HK50 | 1 | 1 | 1 | 1:1 | 1:100 |
| ITALY40 | 1 | 1 | 1 | 1:1 | 1:100 |
| JP225 | 1 | 1 | 1 | 1:1 | 1:100 |
| SPAIN35 | 1 | 1 | 1 | 1:1 | 1:100 |
| STOXX50 | 1 | 1 | 1 | 1:1 | 1:100 |
| SWISS20 | 1 | 1 | 1 | 1:1 | 1:100 |
