What is margin?
Margin is how much money you need to have in your account to open a trade.
What is leverage?
Leverage enables you to put up a fraction of the deposit to access a much larger trade size. For example, in the case of 50:1 leverage (or 2% margin required), $1 in a trading account can control a position worth $50. Leverage is often seen as a double-edged sword – it can magnify your profits, but it can also magnify your losses.
How does leverage work?
Let's look at a typical USD/CAD (US dollar against Canadian dollar) trade. To buy or sell a 100,000 of USD/CAD without leverage would require the trader to put up $100,000 in account funds, the full value of the position. But with 50:1 leverage (or 2% margin required), for example, only $2,000 of the trader's funds would be required to open that $100,000 USD/CAD position.
Magnified profits and losses
While a margin amount of only 1/50th of the actual trade size is required from the trader to open this trade, however, any profit or loss on the trade would correspond to the full $100,000 leveraged amount.
In the case of USD/CAD at the current market price, this would be a profit or loss of around $10 per one-pip move in price. This illustrates the magnification of profit and loss when trading positions are leveraged with the use of margin.
It is important to note that in leveraged forex trading, margin privileges are extended to traders in good faith as a way to facilitate more efficient trading of currencies.
As such, it is essential that you maintain at least the minimum margin requirements for all open positions at all times to avoid any unexpected liquidation of trading positions.
Margin close out / liquidation
If your margin level is at or below the margin close out (MCO) level, we are required to close any or all of your open positions as quickly as possible; this is to protect you from possibly incurring further losses.
We strongly recommend that you monitor your margin level carefully, as you should not expect to receive a margin call or warning prior to closure. The Margin Level Indicator on the trading platform makes monitoring your margin level simple.
The calculation for the margin level indicator is determined by the Net Equity in your account divided by your Total Margin Requirement, multiplied by 100.
To improve your margin indicator do one or more of the following:
- Deposit funds
- Close or part close positions
- Add an order-aware stop loss (Professional clients only)
Please be aware that during times of high volatility market prices can gap and this may affect the prices at which your positions are closed out.