Leverage is a neat thing. When you know how to use it and how to make it pay off and not lose. Most of us have already met with leverage with our brokers but for those who is joining us for the first time I think I am going to explain what leverage is.
Leverage is an opportunity given to you by your broker to control a large sum of money with little to or no percentage of your needed amount at all. For example. Imagine that you only have $1000 and you wanted to put down and profit from a much bigger amount… say $100.000
That is where your broker comes in. You can basically borrow money from your broker and operate it. In our case you are going to be borrowing as much as 100 times more than you already have. This is called 1:100 leverage.
When you come up with the whole amount on your own this is called 1:1 leverage. But this is no fun.
100:1 leverage also requires you to have a 1 percent margin rate.
Oops. I am talking about margin, not leverage, right?
Well, as long as I am here – margin is the initial minimal amount of money that you need in order to open a position with your broker. This is the money used by your broker for maintaining your position open. Most of the forex broker require 0.25-2 percent margin from their users.
Here are some useful terms that can come in handy while studying margin and leverage:
Margin requirement: It is the amount of money which your broker needs from you to open a position. It is expressed in percentages.
Account balance: just another name for your trading bankroll. It’s the total of your trading account.
Used margin: The amount of money that your broker “locks” in order to keep your current positions open. Of course this money is still yours. You just can’t use it until it is given back to you or when you close your positions or when you receive a margin call.
Margin call: means that the amount of money in your account cannot cover your possible loss.
Usable margin: This is the money in your account that is available to open new positions.
Quite easy, right? It is also very interesting.
