What is Leverage ?
Leverage is the use of funds borrowed from a financial intermediary to increase an investor's trading position beyond what would be available from his or her cash balance. Investors often use leverage to take advantage of relatively small price changes in currency pairs, metals, and stocks. Leverage can magnify Both profits and losses. For example, if you’re trading with a 1:200 leverage, and you have $1,000 USD in your account, you’ve got $200,000 available for trading. Although this sounds like an insanely good opportunity, you must always remember that it’s a double-edged sword.
What is Margin ?
It may be easier to understand if you think of the margin as a deposit for the trade that you want to open and maintain. The broker that you’re trading with will keep a portion of your balance to cover the potential loss of that trade. Once you close the position, the margin will be put back into your account.
The margin that you need for a trade is normally expressed as a percentage of the whole trade and is called the ‘Margin requirement’. You’ll be given a margin requirement for every trade that you open, and it will vary depending on the instrument that you trade and the broker that you choose to trade with.
How do you calculate the margin requirement ?
Well, the required margin will be a percentage of the size of the trade that you want to open and is calculated according to the base currency of the pair that you want to trade. Using the equation below you can work out how much margin you’ll need for each trade.
Required Margin = Position Size X Margin Requirement.
Let's say you want to buy 10,000 EUR/USD at an exchange rate of 1.2000, and your broker requires a margin of 2% and offers a leverage of 50:1.
Position size = 10,000 EUR
Margin requirement = 2% = 0.02
Leverage = 50
Margin = (10,000 * 0.02) / 50 = 4 EUR
So, you would need to deposit 4 EUR as collateral to open this position.
What is Stop Out Level?When it comes to Forex trading, the Stop Out Level refers to a particular percentage (%) level of your Margin Level. If this level is reached, your broker will automatically close one or all of your open positions, which is known as liquidation. This occurs because your trading account doesn't have enough margin to maintain the open positions. To be precise, the Stop Out Level is when the Equity drops below a particular percentage of your Used Margin. If this level is reached, MFGinvest will automatically start closing out your trades starting with the most unprofitable one until your Margin Level is back above the Stop Out Level.
Example: Stop Out Level at 5%
This means that your trading platform will automatically close your position if your Margin Level reaches 5%.
Suppose you bought EURUSD, and the market started falling against you.
Used Margin: $200
Equity = Balance + Floating P/L
When your equity is equal to $50 (5% stopout multiplied by the used margin), then your stopout will be triggered and your position will be closed out.