Do You Have to Use Leverage in Indices?
The definition of Indices Leverage is having the ability to control a large amount of money using very little of your own money and borrowing the rest - this is what makes the indices market to attract many stock indices traders.
We shall explain indices leverage first & then explain indices margin in this learn how to calculate stock indices trading leverage & margin indices tutorial.
Indices Example:
We shall us this stock indices examples to explain what indices trading leverage is? If your indices broker gives you indices leverage ratio of 100:1 (this is the best option to select as the maximum indices leverage for any indices trading account)
This means you borrow 100 dollars for every dollar you have in your indices trading account.
To put in another way your indices broker gives you 100 dollars for every 1 dollar in your stock indices account. This is what is referred to as indices trading leverage.
This means if you open a indices trading account with $1,000 & your indices leverage is 100:1, then you get $100 for every $1 you that you have in your indices account, the total amount which you will control is:
If for 1 dollar the broker gives you 100
Then if you have 1,000 in your stock indices account you'll get a total of:
$1,000 * 100 = 100,000 dollars
Now you control 100,000 dollars of Capital after indices leverage
Most new indices traders ask what stock indices leverage is best for 2,000 dollars, or 5,000 dollars, or 10,000 dollars indices account? - The best indices leverage ratio to choose when opening a live Indices account is always 100:1 & not 500:1.
What's Indices Margin?
Stock Indices Margin is the amount of money required by your indices broker so as to allow you to continue indices trading with the borrowed amount - leveraged amount.
In other words the question what's margin in Indices Trading? can be explained as the money required by your indices broker to cover open stock indices trades and is expressed as a percentage. For 100:1 leverage, the amount you will control is 100,000 dollars as explained in the indices example above.
Now can you compare an investor investing $1,000 with another investor investing $100,000? Obviously Not. This is how leverage works in indices trading, it takes you from that guy investing $1,000 to that one investing $100,000. Where does this extra money come from? You borrow from your indices broker in what's simply referred to as Indices Leverage. This money that you borrow from your indices broker, you borrow it against the $1,000 dollar of your own money that you deposit with your indices broker in your indices account. If you were to define what this indices leverage means - then leverage is the ability to control a big amount of money using very little of your own money and borrowing the rest. Otherwise, if you were trade indices without this indices leverage it would not be as profitable as it is, in fact you can still choose not to use indices leverage, using the 1:1 leverage ratio but you would not make money it would take too long to make any indices profit.
Example of how to calculate stock indices trading leverage & indices trading margin:
Indices Trading Margin required in this case is 1,000 dollars (your money) if it is expressed as a percentage of 100,000 dollars in your indices trading account which you control it is:
If indices leverage ratio = 100:1
1,000 / 100,000 * 100= 1%
Stock Indices Margin required = 1%
(1/100 *100= 1%)
"Trade Forex Trading - Please simplify because I am a Indices Beginner"
(Simplify - your indices capital is $1,000 - after indices leverage you control $100,000 - $1,000 is what percent of $100,000 - it is 1%) that's your indices margin requirement for your stock indices trading account.
The indices trading margin example explained and illustrated below, the set indices leverage ratio is 100:1, the indices margin which is 1% is $2683.07, therefore the total amount controlled by indices trader is: $268,307 - this is because with this leverage the trader has used little of his money and borrowed the rest, with this leverage ratio set at 100:1, the trader is using 1% of their capital, this 1% equals to $2683.07, if 1% equals to $2683.07 then 100% is $268,307
What is Indices Leverage for Beginners? - Do You Have to Use Leverage in Indices?
- If = 50:1 Indices Leverage Ratio
Then indices margin requirement = 1/50 *100= 2%
If you have $1,000,
1,000* 50 = $50,000.
1,000 / 50,000 * 100= 2%
(Simplify - your indices trading capital is $1,000 after stock indices leverage you now control $50,000 - $1,000 is what percentage of $50,000 - it is 2 %) that's your indices trading margin requirement
- If = 20:1 Indices Leverage Ratio
Then the indices margin requirement = 1/20 *100= 5%
If you have $1,000,
1,000* 20 = $20,000.
1,000 / 20,000 * 100= 5%
(Simplify - your indices trading capital is $1,000 after stock indices leverage you now control $20,000 - $1,000 is what percent of $20,000 - it's 5 %) that's your trading indices margin requirement
- If = 10:1 Indices Leverage Ratio
Then the indices trading margin percent level requirement is = 1/10 *100= 10 %
If you have $1,000,
1,000* 10 = $10,000.
1,000 / 10,000 * 100= 10%
(Simplify - your trading indices capital is $1,000 after stock indices leverage you now control $10,000 - $1,000 is what percent of $10,000 - it's 10 %) that is your indices margin requirement
What's Difference Between Maximum Stock Indices Leverage & Used Indices Leverage?
However, you should note that there is a difference between maximum indices leverage (trading indices leverage given by your indices broker which is the highest indices leverage ratio you can trade with if you choose to) and used indices leverage ( indices leverage depending on the indices lot size you have opened - open trade lots positions). One is the broker's (Maximum Indices Leverage Ratio) & the other is indices trader's (Used Leverage Ratio). To explain this trading indices leverage concept we shall use the indices example above:
If your indices broker has given you 100:1 Maximum Indices Leverage Ratio, but you only open a trade of 10,000 dollars then Used Indices Leverage is:
10,000 dollars: 1,000 dollars (your money)
10:1
Your have used 10:1 Indices Leverage Ratio, but your maximum leverage ratio is still 100:1 Leverage. This means that even if you're given 100:1 Maximum Indices Leverage Ratio or 500:1 Maximum Indices Trading Leverage Ratio, you do not have to use all of it. It is best to keep your used indices leverage ratio to a maximum of 10:1 indices leverage but you will still select 100:1 maximum indices leverage ratio for your indices trading account. The extra indices leverage will give you what we call Free Indices Trading Margin, As long as you have some Free margin on your indices trading account then your stock indices trades will not get closed by your indices broker because this margin requirement will remain above the required level based on the free margin in your indices trading account.
When it comes to stock indices trading - one of your rules: indices money management rules on your indices trading plan should be to use indices leverage ratio of below 5:1.
In the above indices example, the trader is using $2683.07, total controlled amount is $268,307, but indices trading account equity is $16,116.55, therefore used stock index leverage is ($268,307 divide by 16,116.55) = 16.64 : 1
16.64 : 1 Used Indices Leverage Ratio
Indices margin accounts allow stock indices traders to control a large amount of currency using little of their own money while borrowing the rest
Obtaining this indices margin trading account will enable you to borrow money from the broker to trade indices trading lots with.
The amount of borrowing power your margin indices account gives you what's called "leverage", and is usually expressed as a ratio - a leverage ratio of 100:1 means you can control resources worth 100 times your deposit.
What this means in indices trading terms is that with 1 % margin in your indices trading account you can control one standard indices lot or 1 indices contract worth $100,000 with a $1,000 deposit.
However, trading on this margin indices trading account increases both potential for indices profits as well as indices losses. In indices trading you can never lose more than you invest, indices losses are limited to your deposits and usually indices brokers will close a indices trade transaction that extends beyond your deposit amount by executing a indices trading margin call. Indices traders must therefore try to keep their indices margin level above that required by their indices broker. By using indices money management rules & keeping your used indices leverage ratio below 5:1.
What is Indices Leverage for Beginners? - Do You Have to Use Leverage in Indices? - Leverage in Indices Trading - Stock Indices Leverage Example - Indices Leverage & Margin Explained - Stock Indices Leverage Calculator
