Margin and Leverage in Forex Trading

Margin and LeverageLet’s say,that you want to trade a mini lot,remember that was 0.1 and it was worth,$1 per pip that is 10,000 units of,currency that seems odd but when you trade a mini lot you’re controlling,10,000 units of currency but let’s say that you only have $1,000 in your trading account how can you control a,10,000 unit position and I say units,because your account may be denominated in pounds or euros or yen or whatever. How can you trade 10,000 units of currency with only a $1,000 account?

It’s through the wonders of,margin and leverage and in this longer lesson which you may want to return to,later we’re going to discuss a topic and really simple easy to understand terms,that most people never get but it’s really important your margin is essentially a down payment on a trade. Example, when you buy a house you don’t have to put down the full value of the house otherwise you’re buying the entire house for cash. You offer a down payment equal to a,percentage of the total purchase price, sometimes that’s 10% sometimes,that’s 20% well in the world of trading,you may only have to put up 2% but generally speaking in the world of currency trading you only have to put a small percentage of the total value of the position in order to take the trade,and that’s called leverage.

Leverage is,just like it sounds,it’s adding power to whatever existing capital you have leverage is. In other words, the beautiful thing that your FX,dealer will offer you to put a small down payment up and then,multiply that down payment by a certain number in order to control a larger position. In other words, your dealer will let you control a large position with a small initial investment all. Let’s say that you have a ten thousand dollar trading account, and you want to put up $1,000 as your down payment now we’re going to use the word margin.You’re gonna put up,$1,000 as your down payment or your margin and let’s say that your FX dealer,offers you one hundred to one leverage,meaning they’re willing to let you put up only one percent of the total value of your position. How big of a position,can you control with a $1,000 down payment or margin if they offer you one hundred to one. I know a lot of you might have thought it was ten thousand but if one thousand is one percent of your total position size if you’re FX dealer is offering,you one hundred to one leverage they’re,willing to increase your down payment one hundred times so it’s a 100 thousand unit position.

Let’s do another example and we’ll talk about it if your dealer offers you one hundred to one leverage you live in,Europe or the UK or Australia and they,let’s say you want to trade, let’s say that we want to trade 10 standard Lots each standard lot is,100,000 units of currency that means we’re going to do a position of 1 million units of currency that makes sense. So far,now if each standard lot is $10 a pip,what’s your value per pip if you trade,10 of them yep it’s $100 for every pip,the market moves. Largest trade size I ever took was 80 standard Lots $800 a,pip it was a big big trading account but,I was still pretty freaked out so let’s say you want to control it, let’s say you,want to trade,10 standard Lots that’s a million units of currency and your broker offers you,one hundred to one leverage what you need to do is you need to divide 1 million by 100 now that now that’s just,to simplify the whole process that’s,gonna mean that you have to put up $10,000 as your down payment or as your margin 10,000 times 100.

The margin was the down payment and that’s not money available,to you anymore your FX dealer keeps that,down payment sets it aside and actually,marks it at the bottom of your trading platform as the down payment that’s no longer available to you now it also has a number which called free margin or usable margin is another word that,people use for that term so we’ll call it usable or free margin usable or free margin is the amount of money that you can use for new trades. Number one so that’s the first,thing it is you can use your free margin,for new traits just like a real-estate, investor might have a hundred thousand,dollars to work with and they might have ten thousand dollars out as a down payment on one property and that means they have how much leftover for,more down payments on more properties,$90,000 okay so you could take new,trades with your free or usable margin,but that’s not the only thing that,you’re free or usable margin is used for.

Margin call is the most important,number that you can focus on and the,easiest way to keep this margin level,percent high and you want a high number,the easiest way to do that is and now we,come full circle on our conversation,about trade size is keep your trade size,small trade micros and mini trade sizes,don’t trade standard Lots with a small,trade size you’ll never use very much,margin you’ll never need very much,leverage your free margin or usable,margin will always stay high and you’ll,never get a margin call the last point I,want to make is most traders blow up,their trading account within 90 days 90,of traders lose 90% of their money,within 90 days it’s probably not exactly,that number but that’s pretty close,that’s because they have big trade sizes,in small trading accounts if you have,small trade sizes in every account you,will last past that 90-day mark if you,can last beyond the 90-day mark as a,brand-new trader and you have the,original account that you started with,the chances that you are going to,succeed go way up not gonna throw around,promising statements or anything like,that I’m not gonna make any promises but,the longer you can survive with small,trade sizes the better you can do and,the more likely it is that you’re going,to figure out what trading system you,like while your trade sizes are small,and then as you do better and learn more,you can increase your trade sizes as your confidence and your account grow.

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