What is Margin Leverage?
Margin leverage allows to work with large volumes of instruments, while having a relatively small starting margin amount. This means that if the market will be moving in your favor, your income may be much larger than with traditional work on Forex in the Republic of Belarus. However, if the market moves against you, your losses also will be increasing, and at one moment they can be reach the level of your margin collateral. Therefore, it is important to understand how deals are made on the OTC Forex market in order to manage risks.
Let’s look at few examples in order to understand how marginal leverage works.
Our first client wants to open a deal on the EUR/USD pair at a volume of 0.1 lot.
The contract cost in this case will be €10.000, and if the client makes deals without marginal leverage, he will have to fund an account with this amount.
It is what for marginal leverage is used, standard size of which is 100 (or 1%).
This means that the client should have only 1% of 10,000 euros on an account, which is 100 euros (or equivalent amount in a foreign currency of the account).
Our second client wants to buy a contract on S&P 500 at a volume of 50.
At the same time, the price of the S&P500 index, for example, is $2,000.
To open a position without leverage, the client will need to have 2000 x 50 = $ 100,000 on an account balance.
If use a margin leverage of 100, the client must put only 1% on an account balance in order to open the position. Thus, for only $ 1,000 as initial margin amount, he will be able to open a deal for an amount equivalent to $ 100,000.
Benefits of margin leverage:
- Margin leverage allows you to get the maximum return on your investment, since you can make deals by large lots at equal size of capital;
- You also able to open simultaneously a much larger number of positions than in case of a physical purchase;
- Your income in terms of initial capital is increasing by a multiple of leverage size;
- Using moderate capital, you can invest in several different assets at once.
Risk of using margin leverage is that in case of choosing wrong direction of a deal your potential losses will also increase. If you will not competently manage orders about fixation of the price of underlying asset Stop Loss, you risk losing all your invested funds.
Levels and initial requirements to margin
Each deal opened on your account must be provided with an appropriate level of margin. To maintain safe level of making deals, you must have sufficient resources to cover margin requirements at any time. Usually these resources are called «free margin» – this is part of margin that serves for opening new deals or covering negative price movements in opened deals.
The FTM Brokers company has a limit value of margin level at 30%. If this indicator drops below 30%, the trading platform launches a protective mechanism that automatically closes losing positions, saving you from excessive losses. To avoid such situation, make sure that the level of margin on your account is always above 30%. If the numbers are close to this indicator, you should close part of deals or add additional funds to your account.