Leverage
The concept of financial leverage and its sizes:
Financial leverage is a facility provided by the brokerage company to the investor or speculator so that he can trade with multiple times the size of the capital he owns. For example, if the brokerage company provides financial leverage (1:100), this means that the company provides the investor with the ability to trade with 100 times the size of his transactions in the market.
This means that the brokerage company has provided the trader with a facility that makes his trades in the market reach 100 times the original deal size. This facility will be returned to the company immediately after closing the trading deal, and the profit or loss realized from the deal will be calculated and added or deducted from the original capital.
Forex brokerage companies provide many sizes of financial leverage, to the point that some brokerage companies offer financial leverages that exceed 1,000 times the capital. The type of license or regulatory body supervising the brokerage company contributes to determining the size of the financial leverage that the company is supposed to provide to its clients, and the most famous of these sizes are :
50x leverage (50:1)
100x leverage or (100:1)
200x leverage (200:1)
500x leverage (500:1)
Leverage of 100:1 means that every dollar you use in your trades will be doubled to become $100 in the market while opening trades.
How the margin system works:
Leverage works in Forex through a system called the margin system. The leverage and margin system are considered one integrated system, one inseparable from the other.
Margin is a small amount of capital reserved that allows the trader to open a new trading deal in the market. This amount is determined based on the size of the Forex trading contract in addition to the amount of financial leverage. The margin is not considered a fee or commission, but rather a guarantee of the trader's ability to keep an open trading deal in the Forex market. This amount is returned to the account balance after the deal is closed. The trading broker uses the margin amount to protect it and to cover any losses that may occur to the account during trading. The margin value is The requirement is very small compared to the size of the trading position in the market.
To understand the leverage and margin system in Forex, you must have a good knowledge of Forex trading contracts. Follow the following example with us:
Suppose a trader has a $1,000 account at a brokerage firm that offers leverage of 100:1.
He wanted to open a buy deal on the USD/CHF pair with a mini-lot of 0.10, meaning its quantity is 10,000 units of the base currency, which is the US dollar here.
Without leverage, the trader will not be able to execute a purchase deal for $10,000 with an account size of only $1,000, but with the margin and leverage system he will be able to do so. The company opens the contract to the trader in exchange for reserving a certain value of capital proportional to the size of the contract and the financial leverage, and it is called “Reserved Margin” is calculated by dividing the contract value by the leverage value
10,000 ÷ 100 = $100
So, $100, which is the reserved margin, will be deducted from the capital, leaving $900 in the account, which is the available margin.
If the deal is closed after achieving a profit of $100, for example, they are added to the client’s balance, and the company will return the margin reserved in the previous step to the account, so the balance becomes equal to $1,100. However, if it is closed after a loss of $50, it is deducted from the client’s balance, and the brokerage company will return the margin. Reserved to the account, the balance becomes $950.
How to calculate margin or margin automatically with OLX ⬇️ Forex application
The most important terms associated with the margin system:
Liquidity or Equity:
When you see the word “Liquidity” or “Equity” on the trading platform next to the account balance, it means the current value of your trading account, and liquidity changes instantaneously with the market movement that occurs on open trading deals. Liquidity represents the account balance added to the total floating profits or losses from trading transactions, whether buying or selling in the market.
Required Margin:
It is the total amounts that the brokerage company reserves from the account balance in exchange for maintaining these open deals in the market, so the reserved margin cannot be larger than the account balance in any case.
Free Margin:
It is the result of the difference between the current account liquidity and the reserved margin. The available margin is also known as the usable margin. The available margin expresses the amounts that the trader can use to open new trades in the market. The available margin changes negatively or positively with the open trades in the market.
Margin Level:
The margin level is an important criterion that you must know. It represents the percentage value between the liquidity amount compared to the reserved margin. The margin level can be expressed by the following equation:
Margin level = (Liquidity ÷ Reserved Margin) x 100
By looking at the margin level, you can know whether you can enter into new trading deals or not. The higher the margin level in the trading account, the more deals you can open, and the lower the available margin level, the less money you can open new deals with. When the margin level is 100%, this means that you cannot open any new trades.
Margin call:
the margin level reaches a specific percentage (this percentage varies from one trading broker to another), the broker alerts the trader that the account has reached the risk stage in order to take appropriate action. This stage or warning is called a margin call or margin call. It is called a margin call because the broker actually draws the trader’s attention. About what happens to his account. If the trader does not take appropriate action, the matter may get worse and the account may lose more. In this case, the trading broker will be forced to liquidate the trades or close them automatically, which is what we call the transaction liquidation level or Stop-Out, to stop the losses.
