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Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

What is leverage in currency?

Leverage is a technique which enables traders to 'borrow' capital in order to gain a larger exposure to a particular market, with a comparatively small deposit.

It offers the potential for traders to magnify potential profits, as well as losses.

The currency market offers some of the lowest margin rates (and therefore highest leverage) compared to other leveraged assets, making it an attractive proposition to traders who like to trade using leverage.

Currency leverage explained

Leveraged trading, which is also known as trading on margin, means you can magnify profits if markets move in your favour; however you can also lose all of your capital should markets move against you. This is because profits and losses are based on the full value of the trade, and not just the deposit amount.

Currency is traded on margin, with margin rates as low as 0.5%. A margin rate of 0.5% can also be referred to as a leverage rate of 200:1 (leverage is commonly expressed as a ratio). This means you can open a position worth up to 200 times more than the deposit required to open the trade.

What is margin in currency?

Margin is the amount of money needed to open a leveraged trade. When trading currency on margin you only need to pay a percentage of the full value of the position, which acts as a deposit. Margin requirements can differ between brokers but start at around 0.5% for the most popular currency pairs.

Margin trading can be a double-edged sword however, as although it can increase your profits, it also can increase losses as both profits and losses are based on the full value of the trade.

Currency margin calculator

A currency margin calculator helps traders determine how much capital they need to open a new position, as well as manage their trades. It also helps them avoid margin calls by determining the optimal position size. In order to calculate the amount of margin needed, the trader would enter the currency pair, the trade currency, the trade size in units and the leverage into the calculator.

Margin call vs margin level

Any deposits used to keep positions open are held by the broker and referred to as ‘used margin’. Any available funds to open further positions are referred to as ‘available equity’ and when expressed as a percentage, ‘margin level’.

A margin call occurs when your margin level has dropped below a pre-determined value, where you are at risk of your positions being liquidated.

Margin calls should be avoided as they will lock in any of the trader’s losses, hence the margin level needs to be continuously monitored. Traders can also reduce the chance of margin calls by implementing risk-management techniques.

Currency trading risks

As much as leverage trading can be seen as a way to increase your profit, it also magnifies your risk. For that reason, having a good risk-management strategy in place is essential for currency traders using leverage. Brokers usually provide key risk management tools such as stop-loss orders, which can help traders to manage risk more effectively.

Stop-loss order

A stop-loss order aims to limit your losses in an unfavourable market by closing you out of a trade that moves against you at a price, specified by the trader. However, even if a stop-loss is in place, the close out price cannot be guaranteed due to slippage. You are essentially specifying the amount you are willing to risk on the trade. Learn more about stop-loss orders and how to use them.

Trailing stop-loss

A trailing stop-loss works similarly to a regular stop-loss, in that it aims to limit your losses when the market moves against you. However, with a trailing stop-loss, when the market moves in your favour, the stop-loss moves with it, aiming to secure any favourable movement in price.

Take-profit order

A take-profit order works in the same way as a limit order, in that it’s always executed at the target price you specify. Where the market for any product opens at a more favourable price than your target price, your order will be executed at the better level, passing on any positive slippage.

Guaranteed stop-loss

Guaranteed stop-loss orders (GSLOs) work in a similar way to stop-loss orders, with the main difference being that a GSLO will be executed at the exact price you want, regardless of market volatility or gapping. For this benefit, there is a premium payable on execution of your order, which is displayed on the order ticket. The premium is refunded if the GSLO is not triggered.

Summary

While margin is the deposit amount required to open a trade, leverage is capital borrowed from the broker in order to gain exposure to larger trading positions. Therefore, currency trading on margin enables traders to open larger positions with relatively small deposits.

It’s important to remember that trading on leverage can be risky as losses, as well as profits, are amplified.

Disclaimer: To read more about the disclaimer Click here

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