The system of leverage and margin is one of the most important foundations of forex trading, and understanding their working mechanism is important for anyone who wants to trade currencies in this market. This raises an important question: How can an investor with a small trading capital make a satisfactory profit in Forex?
What is Leverage or Leverage?
At its inception, the foreign exchange market or the forex market was limited to large investors with large capitals who made good profits from the movement of currencies, but with the development of the market and the emergence of brokerage houses, it became what is called financial leverage and the margin system. It has been developed to allow young traders to trade and profit in forex. Most of the time, it makes sense for currencies to move in narrow ranges.
The concept of leverage in the financial markets is the ability to control or trade huge amounts using a very small amount of real money that you have accumulated in brokerage firms, and leverage is the convenience that the brokerage firm provides to the investor or speculator. It is the ability to trade multiples of the capital you own.
For example, if a brokerage provides leverage (1:50), this means that the company provides the investor with the opportunity to trade 50 times the market turnover.
This means that the brokerage house provides the trader with facilities to increase his transactions in the market to 50 times the size of the original deal, and these facilities will be returned to the company as soon as the trade deal is closed, and the profits will be returned to the company. Or the loss from the transaction will be calculated and added or subtracted from the original capital.
To put it more clearly, if you open a $1,000 Eurodollar position, the value of that transaction in the market will be $50,000 because of the convenience of the brokerage firm, and that's what makes up this ratio. A very large profit or loss compared to the original amount.
What are the leverage sizes allowed by brokerage firms?
Forex brokerage firms provide financial leverage in many dimensions to the extent that some brokerage firms offer financial leverage exceeding 1000 times the capital, however, regulatory authorities and authorities that supervise these brokerage firms have limited these leverages due to the risk posed by some countries.
Using these leverages on your capital can be one of the main causes of loss in forex. The type of license or regulator that supervises the brokerage contributes to determining the size of the leverage that the company must provide to its clients, and the most famous of these dimensions.
- 20 times the leverage or (20:1)
- Leverage 50 times or (50:1)
- 100 times the leverage or (100:1)
- Leverage 200x or (200:1)
- Leverage of 100:1 means that every $1 you use in your trades will double to $100 in the market when you open trades.
Leverage mechanism and margin system
Leverage works in forex through a system called the margin system or margin, and the system of leverage and margin is an integrated and inseparable system through which trading takes place in forex.
Margin or margin is a small amount of capital that allows a trader to open a new trading position in the market, and this amount is determined by the size of the forex trading contract in addition to the amount of leverage. The guarantee is not a fee or commission.
Rather, it is a guarantee that the trader will be able to maintain an open position in the forex market and this amount is credited back to the account balance after the transaction is closed and is used by the trading broker to maintain the guarantee amount and cover any amount.
The losses that may occur in the account during trading and the margin value required for trading in the market which is very small concerning its size.
Without leverage, a forex trader can not only close a $10,000 long position with a $1,000 account size, but he can do so with margin and leverage.
The company opens a contract for the trader in exchange for allocating a certain amount of capital in proportion to the size of the contract and the financial leverage. It is called the Reserved Margin and is calculated by dividing the contract value by the leverage value.
What is liquidity or equity?
When you see the word liquidity or liquidity next to the account balance on the trading platform, it means the current value of your trading account, and the liquidity changes instantly with the market movement that occurs in the open trade.
Liquidity represents the account balance added to the total floating profit or loss from trading transactions arising from trading in the market.
Reserved Margin Required Margin:
It is the total amount that the brokerage firm separates from the account balance in exchange for keeping these open transactions in the market, and therefore the reserve margin cannot be more than the account balance.
For free margin:
It is the result of the difference between current account liquidity and reserved margin Usable margin is also known as usable margin Available margin refers to the amounts that a trader can use to open new positions in the market Available margin changes negatively or positively with the open trades in the market.
Very important: As we noted in the previous example, leverage is a double-edged sword, which means that it helps the forex trader to enter into a larger deal, which means making big profits, but it can also lead to big losses and if it is not used wisely and judiciously it can lead to To completely lose the account.
What is the margin level?
Margin level is an important criterion that you should know. Expresses the percentage value between the liquidity amount and the collateral reserved. The margin level can be expressed by the following equation:
Margin Level = (Equity ÷ Reserved Margin) x 100
Looking at the security level, you can see if you can get into new business deals. The higher the margin level in the trading account, the more trades you can open, and the lower the current margin level, the fewer new trades you can open. When the margin level is 100%, it means that you cannot open new positions.
What is a margin call or margin call?
When the margin level reaches a certain percentage (this percentage varies from one trading broker to another), the broker warns the trader that the account has reached a risky stage for him to take the appropriate action, and this stage or warning is called margin call or margin call.
This is called a margin call because the broker is warning the trader of what is happening to their account. If the trader does not take appropriate action, the situation may worsen and the account may lose more. In this case, the broker will have to liquidate or close the trades automatically; This is the level of liquidation of deals or what we call a stop to stop bleeding losses.
Therefore, a margin call or margin call occurs at a certain margin level where trades are close to auto-liquidation to prevent further loss in the trading account, and the percentage of the margin level at which the margin call occurs suddenly changes. intermediary for another person.
What is meant by liquidation level or deal stop?
The trade liquidation or stop level is a certain margin level at which the broker closes the trades automatically and this can be by closing some or all of the open trades and this happens to prevent further loss. The account agent himself, who increases to such an extent that the amounts in the account are exceeded and thus incur a loss, also suffers a loss.
This liquidation or liquidation occurs because the trading account can no longer support open losing trades due to a lack of available margin at a certain threshold or level, so the broker will automatically start closing your positions starting with the most losing trades until the margin level decreases. Transaction filter level exceeded.
The trader should know the margin call level of the brokerage and the level of liquidation of deals. Assuming you open a trading account with a broker with a margin call level of 100% and a liquidation level of 75%, this means:
If you have open positions and the margin level on the account is 100%, you will receive a warning from the broker that you are about to liquidate the positions, and if the margin level drops to 75%, some or all of the open positions will be automatically closed in the market.
What is the difference between margin call completion and stop liquidation in forex trading?
A margin call is a warning that a broker sends to a trader about the imminent occurrence of an automatic closeout. This is just a message or warning. As for transaction liquidation, this is a certain margin level at which transactions are liquidated, and transactions are liquidated after receiving a margin call alert.
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Forex trading