Making Leverage and Margin, Easy To Understand
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Margin and leverage are two important terms that are usually in our daily trades It is very important to understand the meaning and the importance of margin, the way they are calculated, and the role of leverage in margin.
So lets start :
Leverage is a feature offered by your broker, to help the traders to trade larger amounts of trades by having a smaller account balance. For example, when your account leverage is 100:1, you can buy $100 by paying $1. Therefore, to buy $100,000 (one lot), you should pay only $1000
Margin is calculated based on the leverage, but to understand the margin, lets forget about the leverage for now and assume that your account is not leveraged or indeed its leverage is 1:1
Margin is the amount of the money that participates in a position or trade. Let’s say you have a $10,000 account and you want to buy €1,000 against USD. How much US dollars do you have to pay to buy €1,000
EUR/USD rate is currently 1.4314. It means each Euro equals $1.4314. Therefore, to buy €1,000, you have to pay $1,431.40:
€1,000 = 1000 x $1.4314
Therefore:
€1,000 = $1,431.4
If you take a 1000 EUR/USD long position (you buy €1000 against USD), $1,431.4 from your $10,000 account has to participate in this position. When you set the volume to 0.01 lot (1000 unit) and then you click on the buy button, $1,431.4 from your account will be paid to buy 1000 Euro against USD. This $1,431.4 is called margin. Now, if you close your EUR/USD position, this $1,431.4 will be released and will be back to your account balance.
Now let’s assume that your account has a 100:1 leverage. To buy 1000 Euro against USD, you have to pay 1/100 or 0.01 of the money that you had to pay when your account was not leveraged. Therefore, to buy 1000 Euro against USD, you have to pay $14.31
$1,431.4 / 100 = $14.31
Now, please tell me that if you take a one lot EUR/USD with an account with the leverage of 100:1, how much margin will participate in the trade?
One lot EUR/USD = 100,000 Euro against USD
EUR/USD rate: 1.4314
100,000 x 1.4314 = 143,140.00
Therefore:
One lot EUR =$143,140.00
Leverage: 100:1
Margin = $143,140.00 / 100 = $1,431.40
Therefore, to have a one lot EUR/USD position with a 100:1 account, $1,431.40 margin is needed.
Remember to use your brokers trading calculator for easy calculations