Timothy Stevens

Forex Options Trading - Leverage and Margin in Forex Trading

How to?

The meaning of leverage according to the dictionary is the power to control a huge amount of currency while making use of none or little of own money and borrowing the remainder while margin means an edge over something. However, in connection with forex trading, the two are defined differently. To clearly illustrate their comparisons, we will use similar examples to differentiate but connect the two.

For instance, in forex, a trader may control $100,000 with a $1,000 deposit. In ratio form, the leverage here is 100:1, which means the trader controls $100,000 with $1,000. On the other hand, the margin here is the $1,000 which has to be given to be able to use the leverage. The margin serves as an earnest deposit that a trader needs to use in opening a position with the broker. This amount is needed to maintain the trader's position. Margins are commonly in the form of percentage of the positions entire amount, e.g., forex brokers may require 1%, 2% or .5% margin. With this margin, the maximum leverage than can be brandished with the forex trading account can be computed.

There are other forex margin terms that a trader will likely come across with when doing currency trading, such as, "margin required", "account margin", "used margin", "usable margin" and "margin call". All these terms have certain dissimilarities and are defined hereunder to avoid confusion.

The margin required as mentioned above is the margin in the form of percentages required by brokers to be used to open a position. The account margin is all the money in the forex trading account of the trader. The used margin is the amount of money that although the trader still owns, cannot be touched or is in a "locked up" status, to keep open the current position. It goes back to the trading account when the position is closed already or when a margin call is received. Usable margin is the amount of money in the trading account that could still be used to open other positions. Lastly, the margin call is what happens when the required equity of the trading accounts goes below the usable margin and the existing open positions are closed at market price by the dealing desk.

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