The use of Leverage & Margin
One of the main appealing factors about forex trading is the use of Leverage & Margin. It allows you to use a small amount of capital to open and maintain a much larger position. For example, if you want to open a trade of $100,000 worth of EURUSD, you don’t have to have that $ 100,000 dollar in your account!
What is leverage?
Leverage is a concept that enables you to multiply your exposure to a financial instrument, without committing the whole capital necessary to own the physical instrument. When trading using Leverage you only need a fraction of the total value of your position, the rest is effectively lent to you. Profits and losses are based on the total size of the position, so the end result of a trade can be much larger than the initial outlay, in terms of profits or losses. CFDs are a form of leverage trading. The amount needed to open and maintain a leveraged trade is called “the margin”. Trading using leverage is sometimes called “margin trading”. In general, the term leverage is used when a small change in the price of the CFD is amplified into a bigger change so that the CFD offers an “accelerated” return/loss. Leverage of “10%” (or 1:10) means that if the price of the underlying asset changes by 1%, it is as if the price of the CFD changed by 10%. For example, a $100 balance leveraged by 1:10 increases to $1000. This allows you to buy up to $1000 worth of instruments. Information about the predefined leverage set per instrument can be found by clicking on the "Details" link next to the instrument’s name on the platform’s main screen.
At CWG markets, you can use leverage to trade flexibly. The leverage ratio of different account types can be from 1:1 to 1000:1. To minimize your trading risk, margin and leverage will be adjusted dynamically based on the net value of your account and the data releasing period.
|CLASSIC ACCOUNT||ADVANCED ACCOUNT||INSTITUTIONAL ACCOUNT|
|Maximum leverage for retail clients||1:30||1:30||1:30|
|Maximum leverage for professional clients||1:100||1:100||1:100|
What is Margin?
It may be easier to understand if you think of the margin as a deposit for the trade that you want to open and maintain. The broker that you’re trading with will keep a portion of your balance to cover the potential loss of that trade. Once you close the position, the margin will be credited back into your account.
The margin is normally expressed as a percentage of the whole trade and is called the ‘Margin requirement’. You’ll be given a margin requirement for every trade that you open, and it will vary depending on the instrument that you trade and the broker that you choose to trade with.
What are the Margin requirements?
One of the major benefits of trading CFDs is that clients can trade on margin using leverage. CFD trading means clients can trade a portfolio of shares, indices, or commodities without having to tie up large amounts of capital. In order to open and maintain a position, initial and maintenance margin levels must be met. Both the initial and maintenance margin level requirements are specific to each financial instrument.
How do I calculate my Margin requirements?
Initial Margin = (position’s opening price*size of the trade)*initial margin percentage. For example, you buy 30 Facebook stocks CFDs for $75 each (a "Buy" position), then the value of the position would be 30*75=$2,250. If the Initial margin percentage were 20%, the required initial margin would be 20%*2,250=$450. Maintenance Margin = (position’s opening price*size of the trade)*maintenance margin percentage. For example, you buy 30 Facebook stocks CFDs for $75 each (a "Buy" position), the value of the position would be 30*75=$2,250. If the maintenance margin percentage were 10%, then the required maintenance margin would be 10%*2250=$225.