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Margins and Financial Leverage

Margins and Financial Leverage

Definition of Leverage:

The leverage allows the trader to control large volumes of trades as they are used to increase trading volume compared to the size of its small capital. Investing1 allows traders to choose the right leverage for them.

It should also be noted that the large leverage increases the volume of profits and in turn increases the volume of losses. Moreover, trading is possible without the use of leverage.

An Example of Leverage:

Suppose you invested 1,000 USD on a certain pair and chose a leverage of 1:200.

Hence, we say that you can open a deal equal to 200 times of your original investment. In the language of the numbers: 1000 (the amount of your investment) * 200 (leverage) = 200,000 (investment capacity)

Definition of Margin:

Many people differ on the concept of the right margin; some think that the margin is the cost paid by the trader to the brokerage firm. However, this is completely wrong. The margin is a deposit placed by the trader in order to ensure that the transaction remains open. In other words, the margin is the amount of funds your account needs for opening a certain transaction. Moreover, the margin ratio is determined according to your choice of leverage.

An Example of Margin:

In the previous example, we can reverse the process, i.e. if you want an investment capacity of 200,000 USD, you need 0.5% margin, i.e. you need an initial amount of $ 1000

leverage

margin requirements

1:50

2%

1:100

1%

1:200

0.5%

1:400

0.25%

 

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