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Course overview
1. What is forex?2. Major and minor forex pairs3. How do you trade forex?4. Key features of the forex market5. How do leverage and margin work?6. Using risk management in forex7. Conclusion5. How do leverage and margin work?
Leverage gives you greater exposure to the market. Think of leverage as a loan. If you have $1,000 and use it as collateral for a ‘loan’ that equates to $100 for every one of your dollars, you have $100,000 to trade with. This larger position provides the trader with greater exposure to even smaller changes in price.
Margin is the amount of funds required in your trading account to open a transaction and maintain a position open.
The benefit of leverage is that it allows traders to enter and control larger funds using a small margin. This is appealing to many traders, but it is important to remember that margin trading and leverage can be a double-edged sword as they can magnify both wins and losses.
Example of Margin: You have AU$10,000 in your trading account. With a margin of 1%, you can open positions for a total $1,000,000 [$10,000 ÷ 0.01 = $1,000,000].
The leverage ratio measures your total exposure compared to your margin. For example, if you open a trade worth $10,000 with $1,000 in available funds, you are leveraging 10:1.
Margin Call
A Margin Call is a demand to add funds to your trading account. It occurs when your Equity balance falls to 99% of the Margin Requirement needed to maintain your trading positions. In CFD trading, your Equity balance should be no less than your Margin Requirement.
Quiz
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