Leverage allows you to hold a larger positions than your initial cash deposit would otherwise allow. Your deposit is multiplied or leveraged by your broker to increase the value of your underlying investment. The higher the level of leverage applied,then the larger the position a trader can hold open, for the same size of initial deposit.
For example,a client using leverage or gearing of 100:1 could control a position in the forex market of $100,000 with a margin requirement of just $1,000. If they use a leverage ratio of 200:1, then the client would only need an initial $500 to open this position.
Leverage or gearing can raise the potential for high returns when the market moves in your favour. However, you should note that leverage will act against you if and when the market moves in the opposite direction to your prediction.
The default leverage level is set at 1:50, however, clients can request a higher leverage of up to 1:400. Higher leverage levels are subject to approval based on the results of the internal appropriateness test.
When an investor opens an account with a broker, an initial deposit is required in order for the investor to be able to open a position in the market. This cash deposit acts as a buffer to cover any credit risk / market movement. Depending on their agreement, the investor will allowed by the broker to leverage their deposit up to a predetermined limit.
The margin requirement for a forex trade is calculated by using the following formula:
Margin = (Lot Size * Contract Size * Opening Price) / Leverage
Examples below based on a Standard /Classic account 1:100.
||Margin requirement for one standard contract position in EUR/USD at 1.2500 is calculated as follows:
Margin = (1 * 100,000 * $1.2500) / (100) = $1250.00
||Margin requirement of one standard contract position in Gold at 1579.01 is calculated as follows:
Margin = (1 * 100 * $1579.01) / (100) = $1579.01
||Margin requirement for one standard contract position in Silver at 28.70 is calculated as follows:
Margin = (1 * 5000 * $28.70) / (100) = $1435.00
Note: Interest is not required to be paid on the borrowed amount, but if the investors decides to hold his position overnight, interest will be charged as the rolled over rates on the total positions held.
A Margin Call is a level nominated by a brokerage that sets out the minimum amount of money required to trade in the market. If your account falls below the margin call level, you will need to make a further deposit in order to maintain your open positions. Or should you prefer you can close some of your outstanding positions to reduce your margin requirement. At Blackwell Global, Margin Call is set at 80%.
Stop Out Level
In the event that you are unable to maintain sufficient funds in your account after reaching the Margin Call level, and if the value of your account subsequently depreciates to the Stop Out level, your positions will be closed automatically, in order to prevent further losses to your capital. At Blackwell Global, Stop Out level is set at 50%.