Margin and Leverage are important tools for online trading and especially for those who trade in the forex market.
The margin is the amount of money that must be present on your account to continue trading on the forex and other financial markets.
Leverage allows you to move large volumes of money, investing more capital than you actually have.
One of the reasons why many investors are attracted to forex trading is due to the fact that in this market you can get a higher leverage compared to other types of investments. Let’s find out why.
These services are offered by all the top forex brokers in Italy. Although these tools are not simple to use, they are excellent instruments to increase profits with a winning forex trading strategy, but also to maximize the losses.
The margin is a deposit made by the trader on his account in order to operate on the market and we can consider it as a broker guarantee against potential losses.
When the trader opens an account, the broker will ask for an initial margin that will be used to open the forex positions. After this, initial margin may be increased as a protection from losses. Think about the margin as a sort of security deposit to operate on forex market.
The concept of margin is closely linked to that of leverage whom effect is the mechanism that allows the trader to control a higher position than the capital amount actually invested.
The leverage is used to gain on changes in value of a currency pair and it can reach really impressive values.
The broker informs the trader about the leverage condition when he decides to open a new account. The leverage is anything but a loan that the broker gives to trader. Basically when the trader opens a position, he will try to get more profits and to do so the broker will give part of the money to the trader. After closing the position, the broker will get back the money he lent to the trader for opening the position.
Suppose you have opened an account with a broker with a leverage condition of 100: 1. It means that with a margin (deposit) of € 1.000 we can control a position of € 100.000.
This way it is possible to amplify the gains but also the losses.
According to the initial margin required by the broker, you can calculate the maximum leverage obtainable with your account. If it is required a margin of 1%, the leverage is 100: 1 and vice versa. Here it is a table of the major leverage condition offered by broker:
It is time to continue with our investment, which in the meantime has grown to € 1.000.
If you would have had to invest € 100.000 to have a gain of € 1.000, it would not be worth it (only 1% of profit). Being your leverage of 100: 1, your gain will be 100% having invested only € 1.000 (initial margin).
In conclusion, the lever is a great opportunity that any trader can use to his advantage, buying or selling large volumes of a currency pair.
The leverage effect in certain conditions may nevertheless lead to large losses: if for example the cross bought moves in the opposite direction, leverage can magnify losses by burning 100% of invested capital. To avoid such disasters, it is important to learn how to manage the “stop loss“, very important part in the forex trading strategies for beginners.
The basic rule remains to not make reckless investments, especially if you are a beginner.