What is Leverage Trading?
Leverage provides clients with the ability to access larger sums of capital. Meaning that you can hold larger positions or make a higher number of trades than your initial deposit would allow. The use of leverage increases the potential of high returns but also losses.
Here is how different leverage ratios will affect your exposure to the market for an investment of $1,000:
| Leverage | 1:1 | 1:20 | 1:50 | 1:100 | 1:200 |
| Investment | $1,000 | $1,000 | $1,000 | $1,000 | $1,000 |
| Exposure | $1,000 | $20,000 | $50,000 | $100,000 | $200,000 |
What is Leverage Trading?
Leverage provides clients with the ability to access larger sums of capital. Meaning that you can hold larger positions or make a higher number of trades than your initial deposit would allow. The use of leverage increases the potential of high returns but also losses.
Here is how different leverage ratios will affect your exposure to the market for an investment of $1,000:
| Leverage | 1:1 | 1:20 | 1:50 | 1:100 | 1:200 |
| Investment | $1,000 | $1,000 | $1,000 | $1,000 | $1,000 |
| Exposure | $1,000 | $20,000 | $50,000 | $100,000 | $200,000 |
Benefits of Using Leverage
Leverage can be an extremely powerful tool when used carefully and correctly. Explore some of the benefits of leverage trading below:
Magnified profits
Profits are calculated on the full value of your position so trading with leveraged products can significantly magnify your profits.
Trade with low capital
Open larger positions and gain more market exposure for a fraction of the value of your trade.
Shorting the Market
Trading leveraged products to speculate on market movements allows you to benefit on markets that are falling and rising.
Drawbacks of Using Leverage
Leverage trading offers traders a range of benefits but it is also important to consider the downsides too:
Magnified Losses
In the same way your profits can be magnified with margin trading, so can your losses.
Margin Call Risk
If your position moves against you, your broker may ask you to deposit additional funds to keep the position open or close it entirely.
No Shareholder Privileges
When trading leveraged products, you give up the benefit of owning the instrument being traded.
Calculating Your Margin Requirement
When a trader opens an account with a broker, an initial deposit is required in order to open a position in the market. This will act as a deposit to cover any credit risk. Depending on the agreement, the trader could be able to leverage up to a certain limit.
The margin requirement for a forex trade is calculated using the following formula:
Margin = (Lot Size * Contract Size * Opening Price) / Leverage
Examples based on a Standard account (leverage of 30:1).
Forex
Margin requirement for one standard contract position in EUR/USD at 1.2500 is calculated as follows:
Margin = (1 * 100,000 * $1.2500) / (30) = $4166
Spot Gold
Margin requirement of one standard contract position in Gold at 1579.01 is calculated as follows:
Margin = (1 * 100 * $1579.01) / (20) = $7895
Spot Silver
Margin requirement for one standard contract position in Silver at 28.70 is calculated as follows:
Margin = (1 * 5000 * $28.70) / (20) = $7175
Note: Interest is not required to be paid on the borrowed amount, but if the investor decides to hold his position overnight, interest will be charged as the rolled over rates on the total positions held.
Margin Call
Margin Call is a level set by a brokerage that defines the minimum amount of money required to trade in the market. When your account falls below the margin call level, you will need to make an additional deposit to maintain your positions. Alternatively, you can close some of your positions to reduce your required margin. At Blackwell Global, Margin Call is set at 80%.
Stop Out Level
In the event you are unable to maintain sufficient funds in your account after hitting Margin Call, and if your account value depreciates to the Stop Out level, all your open positions will be closed automatically to prevent further loss to your capital. At Blackwell Global, Stop Out level is set at 50%.
Benefits of Using Leverage
Leverage can be an extremely powerful tool when used carefully and correctly. Explore some of the benefits of leverage trading below:
Magnified profits
Profits are calculated on the full value of your position so trading with leveraged products can significantly magnify your profits.
Trade with low capital
Open larger positions and gain more market exposure for a fraction of the value of your trade.
Shorting the Market
Trading leveraged products to speculate on market movements allows you to benefit on markets that are falling and rising.
Drawbacks of Using Leverage
Leverage trading offers traders a range of benefits but it is also important to consider the downsides too:
Magnified Losses
In the same way your profits can be magnified with margin trading, so can your losses.
Margin Call Risk
If your position moves against you, your broker may ask you to deposit additional funds to keep the position open or close it entirely.
No Shareholder Privileges
When trading leveraged products, you give up the benefit of owning the instrument being traded.
Calculating Your Margin Requirement
When a trader opens an account with a broker, an initial deposit is required in order to open a position in the market. This will act as a deposit to cover any credit risk. Depending on the agreement, the trader could be able to leverage up to a certain limit.
The margin requirement for a forex trade is calculated using the following formula:
Margin = (Lot Size * Contract Size * Opening Price) / Leverage
Examples based on a Standard account (leverage of 30:1).
Forex
Margin requirement for one standard contract position in EUR/USD at 1.2500 is calculated as follows:
Margin = (1 * 100,000 * $1.2500) / (30) = $4166
Spot Gold
Margin requirement of one standard contract position in Gold at 1579.01 is calculated as follows:
Margin = (1 * 100 * $1579.01) / (20) = $7895
Spot Silver
Margin requirement for one standard contract position in Silver at 28.70 is calculated as follows:
Margin = (1 * 5000 * $28.70) / (20) = $7175
Note: Interest is not required to be paid on the borrowed amount, but if the investor decides to hold his position overnight, interest will be charged as the rolled over rates on the total positions held.
Margin Call
Margin Call is a level set by a brokerage that defines the minimum amount of money required to trade in the market. When your account falls below the margin call level, you will need to make an additional deposit to maintain your positions. Alternatively, you can close some of your positions to reduce your required margin. At Blackwell Global, Margin Call is set at 80%.
Stop Out Level
In the event you are unable to maintain sufficient funds in your account after hitting Margin Call, and if your account value depreciates to the Stop Out level, all your open positions will be closed automatically to prevent further loss to your capital. At Blackwell Global, Stop Out level is set at 50%.