We have previously explained what margin is, as simply the sum or the amount of funds expected from a trader's account for them to open a new position or to maintain the ongoing. When trading forex on margin, you only need to pay a percentage of the full value of the position to open a trade. Also Leverage is the use of borrowed funds to increase one's trading position beyond what would be available from their cash balance alone.
Looking at the definition of the two, the margin and leverage seems to be related in some way.
What is the relationship between Margin and Leverage？
You use margin offered by your broker to create leverage. Therefore Leverage is the increased “trading power” that is available when using a margin account.
Leverage allows you to trade positions higher than the amount of money in your trading account.
Forex traders often use leverage to profit from relatively small price changes in currency pairs. Leverage, however, can amplify both profits as well as losses. It can be indicated as a ratio.
Leverage is the ratio between the amount of money you really have and the maximum amount of money you can trade. It is usually demonstrated with an “X:1” format.
For instance, if you intended to trade 1 standard lot of USD/JPY and did not apply margin, you would need $100,000 in your account.
But including a Margin Requirement of just 1%, you would only to deposit $1,000 in your account.
The leverage provided for this trade would be 100:1.
Below are some examples of Leverage Ratios depending on the Margin Requirement
Check the steps below on how to calculate Leverage:
Leverage = 1 / Margin Requirement
Another example when the Margin Requirement is 2%, heres how to calculate leverage:
50 = 1 / .02
The leverage is 50, which is expressed as a ratio, 50:1
Now let's show how to calculate the Margin Requirement based on the Leverage Ratio:
Margin Requirement = 1 / Leverage Ratio
Whil, with the Leverage Ratioas 100:1, heres how to calculate the Margin Requirement.
0.01 = 1 / 100
The Margin Requirement is 0.01 or 1%.
You can observe from the given examples , leverage has an inverse relationship to margin.
Therefore “Leverage” and “margin” refer to the same concept, just from a slightly different angle. When a trader opens a position, they are required to put up a fraction of that positions value “in good faith”. In this scenario, the trader is said to be “leveraged”.
While The “fraction” part which is simplified in percentage terms is known as the “Margin Requirement”. For example, 2%. And we also known The actual amount that is required to be put up is known as the “Required Margin”.
For example, 2% of a $100,000 position size would be $2,000. The $2,000 is the Required Margin to open this specific position.
As you are able to trade a $100,000 position size with just $2,000, your leverage ratio is 50:1.
Leverage = 1 /Margin Requirement
50 = 1 / 0.02
Continue Reading: https://www.wikifx.com/en/learn/202201196184810863.html