Leverage and Margin Explanation & Examples

Margin required : It's amount of money your online broker requires from you to open a trade. It is denoted in %s.

Equity : It's the total sum of capital you've got in your trading account.

Used margin : amount of money in your account which has been already used up when buying a trading contract, this contract is the one which is displayed in open positions. As a trader you as a stock indices trader can not use this amount of money after opening a trade because you have already used it and it isn't available to you.

In other words, because your online broker has opened up a trade for you using the capital you've borrowed, you must sustain this usable margin for your account as a security to allow you the trader to continue using this leverage he has given you.

Free margin : amount in your trading account which you as a stock indices trader can use to execute new transactions. This is amount of money in your trading account which has not yet been trading leveraged because you haven't yet opened a trade with this money - this amount is also very important for you because it facilitates you to continue holding your open trade positions as explained and illustrated below.

However, if you over use leverage, this free margin will go below a certain % at which your broker will have and be forced to close out all your trades automatically/mechanically, leaving you with a big loss. Broker at this point mechanically/automatically closes all your open trade position because if your positions are left open broker would lose the money you will have borrowed from them.

This is why you should always make sure you've got a lot of free margin. To do this as a trader never trade more than 5 % of your account, in fact two percentage is advised.

Difference Between Leverage Set by Broker & Used Leverage

If the set stock leverage is 100: 1, it means you as a stock indices trader can borrow up to $100 for each $1 you have, but you don't have to borrow all of the $100 for each $1 you have, but you as a stock indices trader can select to borrow 50:1 or 20:1. In this case even though the leverage option set 100:1 your used leverage will be the 50:1 or 20:1 that you as a trader have borrowed to make a trade.

Example:

You have $1000 dollars (Equity)

Set 100:1

Leverage Used = Amount used /Equity

If you buy lots equivalent to $100,000 dollars that as a trader you'll have used

= 100,000/1000

= 100:1

If you buy lots equal to $50,000 dollars which you as a trader will have used

= 50,000/1000

= 50:1

If you buy lots equal to $20,000 that you as a trader will have used

= 20,000/1000

= 20:1

In these Three cases you as a stock indices trader can see that though the set is 100:1

Used is 100:1, 50:1, 20:1 depending on size of lots transacted.

So Why not Just Choose 10:1 option as the Maximum Leverage? Because to keep within the suitable risk management guidelines it is even recommended that traders use lesser than this?

This question may seem straight forward but it is not, because when you trade you use borrowed funds referred to as Trading Leverage. When you borrow capital from anybody or a bank you as a Stock Index trader must maintain security/collateral to acquire a loan, even if the security is depending and based on the monthly deductions from your wages, same thing with Stock Indices Trading.

In indices trading the security is known as margin. This is the trading capital which you deposit with your broker.

This is calculated in real-time as you trade. To keep your borrowed money you as a Stock Index trader must sustain what is referred to as the required capital (your deposit).

Now if Your Trading Leverage is 100:1

When trading if you have $1,000 and use leverage 100:1 and buy 1 standard lot for $100,000 then your margin on this transaction is $$1000 in your account, this is the money which you will lose out if your open position moves against you, the other amount $99,000 that's borrowed, they will close out the open trade positions automatically once your $1,000 has been taken out by the market.

But this is if your online broker has set 0% Stock Index Margin Requirements before closing out your trades automatically.

For 20 % prerequisite before closing out your transactions automatically/mechanically, then your trades will be closed once your trading account balance reaches $200

For 50 % requisite of this level before closing out your trades automatically/mechanically, then your trades will be closed out once your trade account balance reaches $500

If they set 100% requisite of this level before liquidating your open trade positions mechanically, then your trade will be closed out once your account balance gets to $1,000: Explanation the Stock Index trade position will closeout as soon as you open it because even if you pay 1 pips spread your account balance will get to $990 & the needed % is 100% i.e. $1,000, therefore your trade positions will immediately get liquidated.

Most online brokers do not set 100% requirement, but there are those who set 100% aren't suitable for you at all, select those set 50 % or 20 percent% margin requirements, in fact, those online brokers that set at 20 percent% are among some of the best because the likelihood they close out your trade is reduced as displayed and shown in example revealed above.

To know about this level which is calculated by your trading platform automatically - MetaTrader 4 Indices Platform will display this as "Indices Margin Requirements", This will be displayed as a percent higher the percent the less likely your transactions are to get stopped out.

For Example if

Using 100:1

If leverage is 100:1 & you trade lots equal to $10,000

$10,000 divide by 100:1, used equity is $100 dollars

Calculation:

= Capital Used * %(100)

= $1,000/$100 * %(100)

Index Margin Requirements = 1000 %

Investor and Trader has 980 percent above requirement amount

Using 10:1

If leverage is 10:1 and you trade lots equal to $10,000

$10,000 dollars divided by 10:1, used equity is $1000 dollars

Calculation:

= Capital Used * %(100)

= $1,000/$1000 * %(100)

Index Margin Requirement = 100 percentage

Investor and Trader has 80 % above the required sum

Because when a trader has got a higher leverage means that they've more % above what is required (A.K.A. More "Free Margin") their open indices transactions are less likely to get closed. This is reason why traders will choose ratio 100:1 for their trading account but in accordance to their equity management principles, these traders won't trade above 5:1.

These Levels are Shown on the Platform Screenshot Below as an Example:

Leverage & Indices Margin

MetaTrader 4 Stock Software

Get More Tutorials & Topics:

Trade Stock Indices

Leverage and Margin Explanation & Examples

Difference Between Leverage Set by Broker & Used Leverage

Now if Your Trading Leverage is 100:1