leverage and margin

The concepts of leverage and margin are widely used in most financial markets. Investors can use the idea of leverage to potentially increase their profits on any particular investment. In the Forex markets, the leverage on offer is amongst the highest available in the financial markets. Typically, in the forex markets, leverage levels are set by your broker and can vary from 1:1, 1:50, 1:100 and even higher.

To invest in forex trading, the first thing you need is a trading account with a broker. The initial amount that needs to be deposited into this trading account will depend on the margin percentage agreed between you and the broker.

Standard trading is done on 100,000 units of currency. For this level of trading, the margin requirement would typically be from 1 - 2%. On a 1% margin requirement, the investor would have to deposit $1,000 to trade positions of $100,000. Effectively, the investor is trading 100 times his or her original margin deposit. The leverage in this case is 1:100. One unit controls 100 units.

Leverage of this magnitude is significantly higher than the 1:2 leverage usually provided on equity trading for example or the 1:15 on the futures market. These leverage levels are only possible due to the lower price fluctuations on the forex markets as opposed to the higher fluctuations on the equity markets.

Typically forex markets change less than 1% a day. If the forex markets fluctuated as much as the equity markets for example, forex brokers would not be in a position to offer such high leverage as this would expose them to higher than acceptable risk levels.

Using leverage allows for significant scope to maximize the returns on profitable trades. After all, applying leverage means you can be controlling currencies worth 100 or more times the value of your actual investment.

Leverage is a double-edged sword however. If the underlying currency in one of your trades moves against you, the leverage in the trade will magnify your losses.

If this happens and your margin drops below the required levels, FXCC may initiate what is known as a "margin" call against you. In this scenario, we will either instruct you to deposit additional funds into your account or close out some or all of your positions to limit loss to both yourself and us.

Your trading style will greatly dictate your use of leverage and margin. A well thought out trading strategy, prudent use of trading stops and limits and effective money management can make for profitable application of leverage and ultimately, profitable trading.

At FXCC, clients may select their required leverage from 1:1 all the way up to 1:500.

Clients looking to change their leverage levels can do so by submitting a request to: accounts@fxcc.com

If you are looking to trade higher leverage - keep in mind: Leverage is a tool. Used properly it can allow for maximized profits. Used unwisely, leverage can turn around and bite.