Trading Leverage Examples & Margin Example & Examples
Margin required : It's sum of money your broker requires from you to open a trade transaction. It's expressed in %s.
Equity : It's the total sum of capital you have in your account.
Used margin : amount of money in your account that has been already used up when buying a trading contract, this contract is one that is displayed in open positions. As a trader you can not use this sum of money after opening a trade because you have already used it & it is not available to you.
In other words, because your broker has opened up a trade transaction for you using the capital you've borrowed, you must maintain this usable margin for your account as a security to allow you to continue using this indices Leverage Examples he has given you.
Free margin : amount in your account that you can use to open new trade transactions. This is amount of money in your account which hasn't yet been indices Trading Leverage Examples 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 transactions as it will be described below.
However, if you over use indices Trading Leverage Example, this free trading margin will go below a certain % at which your stock broker will have to close all your trade transactions automatically, leaving you with a large loss. broker at this point will automatically close all your open trades because if your open trade positions are left open then your broker would lose the money that you would have borrowed from them.
This is why you should always make sure you have a lot of free margin. In order to do this never trade more than 5 percentage of your account, in fact 2 % is advised.
Difference Between Leverage Examples Set by the Broker & Used Leverage Example
If the set indices Trading Leverage Example is 100: 1, it means you can borrow up to 100 dollars for every 1 dollar that you have, but you don't have to borrow all of the 100 dollars for every 1 dollar you've, 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 Examples will be 50:1 or 20:1 that you have borrowed to make a trade transaction.
Example:
You have $1000 (Equity)
Set 100:1
Trading Leverage Examples Used = Amount used /Equity
If you buy index lots equal to 100,000 dollars you will have used
= 100,000/1000
= 100:1
If you buy trading lots equal to 50,000 dollars that as a trader you will have used
= 50,000/1000
= 50:1
If you buy trading lots equal to 20,000 dollars that as a trader you will have used
= 20,000/1000
= 20:1
In these 3 cases you can see that though the set is 100:1
The used leverage is 100:1, 50:1, 20:1 depending on size of lots traded.
So Why not Just Choose 10:1 option as the Maximum Leverage Example? Because to keep within the suitable risk management guidelines it is even advised that traders use less than this?
This question might seem straight forward but it's not, because when you trade you as a trader use borrowed equity referred to as Leverage Example. When you borrow capital from anyone or from a bank you must keep a security or collateral to acquire a loan, even if the collateral is depending on monthly deductions from your own salary, same thing with Trading.
In trading the security is referred to as margin. This is the capital that you deposit with your broker.
This is calculated in real-time as you trade. To keep your borrowed money you must maintain what is known as required capital (your deposit).
Now if Your Leverage Examples is 100:1
When trading if you have $1,000 & use leverage ratio 100:1 and buy 1 standard contract for $100,000 your margin on this trade transaction is the $1000 dollars in your account, this is the money that you will lose if your open trade transaction moves against you, the other amount $99,000 that's borrowed, they will close the open trades automatically once your $1,000 has been taken by market.
But this is if your broker has set 0% Margin Requirements before liquidating your stock trades automatically.
For 20% requirement before liquidating your stock trade transactions automatically, then your trade transactions will be stopped out once your account balance gets to $200
For 50 % requirement of this level before liquidating your stock trade transactions automatically, then your trade transactions will be closed once your account balance gets to $500
If they set 100% requirement of this level before liquidating your open positions automatically, then your trade transaction will be closed once your balance gets to $1,000: Explanation the trade will close-out as soon as you open it because even if you pay 1 pip spread your account balance will drop to $990 and the needed percent is 100 percent i.e. $1,000, hence your orders will immediately get liquidated.
Most online brokers don't set 100% requirement, but there are those that do set 100% are not appropriate for you at all, select those set 50 percent or 20 percentage margin requirement, in fact, those brokers that set at 20 % are some of the best because the likely-hood they close-out your trade position is reduced as displayed in the example above.
To know about this level which is calculated by your platform automatically - the MetaTrader 4 Platform will show this as "Indices Margin Requirement", This will be shown as a percent higher the percentage the less likely your trade transactions are to get closed.
For Example if
Using 100:1
If indices Trading Leverage Example is 100:1 & you trade lots equivalent to $10,000
$10,000 dollars divide by 100:1, used equity is $100
Calculation:
= Capital Used * Percentage(100)
= $1,000/$100 * Percentage(100)
Indices Margin Requirements = 1000%
Trader has 980 percent above requirement amount
Using 10:1
If indices Trading Leverage Example is 10:1 & you trade lots equivalent to $10,000
$10,000 dollars divide by 10:1, used equity is $1000
Calculation:
= Capital Used * Percentage(100)
= $1,000/$1000 * Percentage(100)
Indices Margin Requirement = 100%
Investor has 80% above the requirement amount
Because when a trader has a higher indices Trading Leverage Example means that they have more percent above what is required (A.K.A. Known As More "Free Margin") their open trading transactions are less likely to get closed out. This is reason why traders will choose ratio 100:1 for their account but according to their money management guidelines, these traders will not trade above 5:1.
These Zones are Shown on the Software Image Below as an Example:
MetaTrader 4 Software
