Leverage and Margin

Traders have the option of using leverage and margin when trading CFDs at ForexTB. The two terms are in fact intertwined, as you use your margin to create your leverage. While leverage can increase the potential return on your investments, it can also increase potential losses, so it’s imperative that you think carefully about the amount of leverage you want to use. Using leverage, both successful and unsuccessful deals are, in simple terms, amplified.

Leverage

Leverage is the ratio between the amount of money you actually have to the amount of money you can trade and is usually expressed as a X:1 format. Leverage makes it possible to command much larger positions with a small amount of capital in comparison.

For example, if the leverage of your account is 30:1, this means you can trade up to 30 times the equivalent amount of base currency you have in your account. This theory is correct no matter what leverage you are using.

Margin

When you use leverage to trade on CFDs, you have to maintain a certain level of funds in your account (the necessary margin), also known as a good faith deposit. By calculating and understanding your margin requirements beforehand, you are able to apply good risk management and avoid any unnecessary margin calls resulting in the closing of a position due to a lack of margin in your account.

Margin Call

Although margin trading can help magnify potential returns on positions, leveraged trading also has increased risks. A margin call is used by brokers to inform traders that their account has depreciated to a specific value (value depends on the broker). Leveraged trades that move in the opposite direction from your prediction can rapidly drain your available capital.

Trades with leverage that move in the wrong direction can multiply quickly and drain your available trading capital much more rapidly.