Indices Trading Leverage & Margin Trading Explanation & Examples

Margin required : It's amount of money your indices broker requires from you to open a trade transaction. It's denoted in percents.

Equity : It's the total amount of capital you have in your trading account.

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

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

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

However, if you over use stock indices trading leverage, this free trading margin will go below a certain % at which your stock indices broker will have to close out all your positions automatically, leaving you with a large loss. Index broker at this point automatically closes all your open trade position because if your trade positions are left open broker would lose the money you'll have borrowed from them.

This is why you should always make sure you've a lot of free margin. ToIn-order-to do this as a trader never trade more than 5 percent of your stock indices account, in fact 2 % is adviced.

Difference Between Stock Indices Trading Leverage Set by Broker & Used Indices Trading Leverage

If the set stock index leverage is 100: 1, it means you can borrow up to 100 dollars for every 1 dollar you have, but you don't have to borrow all of the 100 dollars for every 1 dollar you have, but you can decide to borrow 50:1 or 20:1. In this case even though the leverage ratio option set 100:1 your used indices trading leverage will be the 50:1 or 20:1 that you have borrowed to make a trade position.

Example:

You have 1000 dollars (Equity)

Set 100:1

Indices Leverage Used = Amount used /Equity

If you buy index lots equal to 100,000 dollars that as a trader you will have used

= 100,000/1000

= 100:1

If you buy indices lots equal to 50,000 dollars that you will have used

= 50,000/1000

= 50:1

If you buy indices lots equal to 20,000 dollars that you will have used

= 20,000/1000

= 20:1

In these 3 cases you can see that even though the set is 100:1

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

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

This question might seem straight forward but it is not, because when you trade you use borrowed money known A.K.A. Indices Trading Leverage. When you borrow capital from anyone or a bank you must maintain security or collateral to acquire a loan, even if the security is based on monthly deduction from your salary, same thing with 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 must sustain what is known-asreferred-to-as the required trading capital (your deposit).

Now if Your Stock Indices Trading Leverage is 100:1

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

But this is if your indices broker has set 0% Indices Margin Requirement before stopping out your stock indices trades automatically.

For 20 percent prerequisite before closing out your stock indices transactions automatically, then your trades will be closed once your account balance gets to $200

For 50% requisite of this level before stopping out your stock indices positions automatically, then your trades will be closed out once your trade account balance gets to $500

If they set 100% requisite of this level before stopping out your open positions automatically, then your trade transaction will be closed out once your account balance gets to $1,000: Explanation the trade position will close-out as soon as you open it because even if you pay 1 pips spread your account balance will get to $990 and the needed percentage is 100% i.e. 1,000 dollars, therefore your trade orders will immediately get stopped out.

Most brokers do not set 100% requirement, but there are those who set 100% are not suitable for you at all, select those set 50% or 20% margin requirements, in fact, those indices brokers that set at 20% are some of the best because the likelyhood they close out-out your trade position is reduced as displayed in example above.

To know about this level which is calculated by your trading software automatically - MetaTrader 4 Indices Trading Platform will display this as "Indices Margin Requirement", 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 stock indices leverage is 100:1 & you trade indices lots equal to $10,000

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

Calculation:

= Capital Used * Percentage(100)

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

Indices Margin Requirement = 1,000 %

InvestorTrader has 980 percent above requirement amount

Using 10:1

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

$10,000 dollars divide by 10:1, used capital is $1000

Calculation:

= Capital Used * Percentage(100)

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

Indices Trading Margin Requirement = 100 %

Investor has 80% above the required sum

Because when a trader has a higher indices leverage means that they have more percent above what is required(A.K.A. More "Free Indices Trading Margin") their open indices trading transactions are less likely to get closed. This is reason why traders will choose ratio 100:1 for their trading account but according to their money management rules, these traders will not trade above 5:1.

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

MetaTrader 4 Stock Indices Software