Leverage

Leverage and Margin

Leverage and Gearing

Leverage enables you to gain a large exposure to a financial market while only tying up a relatively small amount of your capital.

CFDs are leveraged, which means you only have to put down a small deposit for much larger exposure. Leverage can make your investment capital go further, but if the market moves against you there’s a risk you can lose more than your deposit.  Please Click Here for more information.

Margin

When trading, you must maintain a certain level of funds in your account (the necessary margin), also known as a good faith deposit. Calculating and understanding your necessary margin requirements beforehand allows you to apply good risk management and avoid any unnecessary margin calls resulting in the closing of a position due to not enough margin in your account.  Additional info regarding margin and margin calls can be found below.

Disclaimer: The Leverage / Margin requirements may be subject to change as a result of applicable regulations in your country of residence. For residents of Poland, the maximum leverage is 1:100.

Is Leveraged Trading Risky?

Even though you only put up a relatively small amount of capital to open a position (initial margin), your profit or loss is based on the full value of the position. So the amount you gain or lose might seem very high in relation to the sum you’ve invested. However, it should always be kept in mind that leverage not only magnifies your potential profits but also your potential losses. It is possible to lose much more than your initial margin if the market turns sharply against you.

It is also vital to remember that you could be called upon to put down more margin and cover your losses if the market goes in the wrong direction for you.

Margin Account & Requirements

You need to ensure that you have sufficient margin on your trading account, at all times, in order to maintain an open position. In addition, you need to continuously monitor any open positions in order to avoid positions being closed due to the unavailability of funds: it should be noted that 24FX is not responsible for notifying you for any such instances.

LOTs

Below is table showing the pip’s value per different trade sizes. ‘Lots’ are referred to the trade sizes in the MT4 platform:

1,000 = 0.01 lots = 10 cents

10,000 = 0.10 lots = $1.00

100,000 = 1 lot =$10

1,000,000 = 10 lots = $100

10,000,000 = 100 lots = $1,000 and so on.

The bigger the trade size, the bigger the pip’s value. If a trader invests $10,000 to his trading account and opened a buy (long) trade of 3,000,000 (30 lots) in EUR/USD, each pip would be worth $300.

If EUR/USD gained 50 pips, the profit would be $15,000. If EUR/USD drops by just below 30 pips the entire invested capital is in risk. Caution should be taken when using the leverage in the markets.

Margin

Margin is calculated based on the leverage used and is the amount of equity needed to open and maintain a position.

Formula: Margin = (Quantity*Lot) / Leverage.

Assuming that your account has 1:100 leverage and you want to buy 1 Lot (fixed at 100,000) EUR/USD, then you have to pay 1/100 of the invested amount (this will be the margin used for this single position).

1 Lot EUR/USD = 100,000 EUR against USD

If the EUR/USD rate was 1.12 the Trade value will be (100,000 * 1.12) or 120,000 USD

Therefore your margin for this position is (120,000/100) 1,200 USD.

Free Margin

The free margin is shown at the bottom of your platform and is the difference of your account equity and the open positions margin.

Free margin = Equity – Margin

Margin Level

A percentage value based on the amount of available usable margin .If the margin level is less than 100% 24FX may freeze opening new orders. If the margin level is lower than the margin call level you are advised to deposit more funds, 24FX may automatically close your open orders and prevent further trading if the margin level falls below the stop out level

Formula: Margin Level = (Equity/Margin) * 100

Margin call refers to the margin level where the broker will ask you to deposit more funds because you are utilizing a very high percentage of your equity.

It should be noted that the Firm is not responsible for notifying you for any such instance but your advised to maintain a margin level above 25%.

 

Stop Out level is 10%, and this refers to the margin level where the system will start closing your positions automatically in order to increase the margin level above 10%. It should be noted that the Firm is not responsible for notifying you for any such instance.

Example 1

Client deposits 10,000 USD and sets the maximum leverage to 1:100. So the trader could open positions of up to (10,000 * 100) 1,000,000 USD which is equal to 10 Lots.

Then opens a BUY position of 5 LOT EUR/USD at 1.12.

Volume of the particular position will be (500,000 EUR * 1.12) 560,000 USD.

Margin will be ( 560,000/100) 5600 USD.

Free Margin will be (10,000 – 5,600) 4,400 USD

Margin Level will be [(10,000/5600)*100]  178.57%

Profit-making Scenario:

If the EUR/USD rate rise to 1.135, the trader will make a gain of [( 500,000 EUR * 1.135) -560,000 USD] 7,500 USD.

Free Margin will rise to (17,500 – 5,600) 11,900 assuming the position was not closed yet.

Margin level will rise to [(17,500/5600)*100] or 312.5%

Loss Making Scenario:

If the EUR/USD rate falls to 1.105, the trader will make a loss of [560,000 USD – (500,000 EUR * 1.105)] 7,500 USD.

Free Margin will fall to (2,500 – 5,600) -3100 assuming the position was not closed yet.

Margin level will fall to [(2500/5600)*100] or 44.6%

Since the margin level is below 100%, trader could not open new positions

If the EUR/USD continues to fall and reach 1.101, the trader will have a loss of [560,000 USD – (500,000 EUR * 1.101)] 9500 USD.

Margin Level will fall to [500/5600 * 100] 8.9%, this is below the stop out level of 10% so the trade will automatically be closed by the system,

Example 2

Client deposits 10,000 USD and sets the maximum leverage to 1:300. So the trader could open positions of up to (10,000 * 300) 3,000,000 USD which is equal to 30 Lots.

Then opens a BUY position of 20 LOT EUR/USD at 1.12.

Volume of the particular position will be (2,000,000 EUR * 1.12) 2,240,000 USD.

Margin will be ( 2,240,000/300) 7,467 USD.

Free Margin will be (10,000 – 7,467) 2,533 USD

Margin Level will be [(10,000/7,467)*100]  133.92%

Profit-making Scenario:

If the EUR/USD rate rise to 1.135, the trader will make a gain of [( 2,000,000 EUR * 1.135) -2,240,000 USD] 30,000 USD.

Free Margin will rise to (40,000 – 7,467) 32,533 assuming the position was not closed yet.

Margin level will rise to [(40,000/7,467)*100]  536.69%

Loss Making Scenario:

If the EUR/USD rate falls to 1.11625, the trader will make a loss of [2,240,000 USD – (2,000,000 EUR * 1.11625)] 7,500 USD.

Free Margin will fall to (2,500 – 5,600) -3100 assuming the position was not closed yet.

Margin level will fall to [(2500/7,467)*100] or 33.48%

Since the margin level is below 100%, trader could not open new positions

If the EUR/USD continues to fall and reach 1.1155, the trader will have a loss of [2,240,000 USD – (2,000,000 EUR * 1.11525)] 9500 USD.

Margin Level will fall to [500/7,467 * 100] 6.69%, this is below the stop out level of 10% so the trade will automatically be closed by the system.

Conclusion

The above examples illustrate the importance and impact of margin and leverage to your account.

Higher margin and leverage (as used in example 2) increase the potential profits of a EUR/USD move at 1.135 but at the same time increases potential losses.