Leverage & margin requirements
At FXB Trading, you have the flexibility to boost your trading power with leverage that starts at 1:1 and goes up to 1:500.
Leverage is the ability to control a position which is a greater value than that of your investment. When leveraging your investment, you only have to deposit a fraction of the current value of the instrument you are investing in. Therefore, traders can control large amounts of capital using very little money; the higher the leverage, the higher the level of risk.
Why do traders like leverage?
Traders like leverage as it means that they can trade much larger volumes than the capital they have in their trading account. The easiest way to understand leverage is through a simple example:
Let’s say that leverage is 1:100 when you opened your trading account with us. You then see a trading opportunity and open a $10,000 position. You don’t have $10,000 in your trading account, but you have $100, which is the amount required to open your $10,000 position. Your 1:100 leverage means that, in effect, you borrow from FXB to cover your position and your $100 is set to one side as soon as you place the trade. Basically, you are able to trade 100 times the amount you have in your trading account.
If your prediction is correct and you start to see a profit on your position, what impact does your 1:100 leverage have? The value of your $10,000 position (a position that you are controlling with $100 in your trading account) has risen to $10,100. That means that you have made 100% profit. Remember, you only invested $100 of your own money and your 1:100 leverage covered the rest.
Is leverage risky?
There are a lot of opportunities to make substantial profits, but you need to make careful trading decisions and ensure that you manage your risk effectively. Higher leverage equals higher risk. If you would like to discuss which leverage is right for you, please get in touch with your FXB Trading account manager.
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Margin is the amount of money that is required to open or maintain positions in a trade. Margin is calculated based on the leverage. Read the example below in order to understand how to calculate margin:
Your margin is a percentage of the trading position you take. It’s the money you need to place a leveraged trade and it acts as a guarantee for the position you open. So, if you open a $10,000 position and FXB requires a 1% Margin, you will need to have $100 of your own funds (required margin) in your trading account. FXB will lend you the rest. Your margin gives you access to leverage. If you don’t have the required margin in your account, you won’t be able to place a leveraged trade.
Your used margin is the amount that has been set aside when you open leveraged positions.
Free or available margin is the difference between account equity and the required/used margin. Free margin can be used to open new positions or cover open ones in the event of a margin call.
Margin call occurs when there isn’t enough free margin in your account to maintain an open position. If this happens, your account equity falls below a certain level. Therefore, you will receive a margin call warning requesting that you deposit additional funds to avoid your positions being automatically closed or stopped-out.
Stop out level
If you receive a margin call, you’ll have to act fast to avoid your open positions being stopped out. This means that your margin has reached the stop out level at which the trading platform will start to close open positions until your account satisfies the required margin level again. Orders will be stopped out in a certain order, starting with the least profitable position.
Assume that you have a trading account with a broker who has set a 50% margin call level and 20% stop out level. Your balance is evaluated at $10,000 and you open one trading position with $1,000 margin. If the loss on this position reaches $9,500, your account equity turns out to be $10,000 – $ 9,500 = $500. This is already 50% of your current used margin, so the broker will issue a margin call warning. Thereby, when your loss on position reaches $9,800 and your account equity appears to be $10,000 – $9,800 = $200 (i.e. 20% of the used margin), it will then trigger a stop out and the broker will close your losing position to prevent all future losses.
If you would like more information about FXB Trading’s leverage and margin requirements, feel free to get in touch with us by clicking the live chat button, sending an email to [email protected] or by calling +44 (0)203 504 1520.