Leverage & Margin

What is Leverage?

Leverage allows a trader to use the banks or brokers funding and therefore the trader need only to provide a portion of the contract value, yet the higher the leverage, the higher the risk. 

Leverage allows for a lower dollar amount to enter the market and increase market exposure, While leverage can be a great tool in gaining access to an otherwise inaccessible market, it can also quickly work against the trader. However, properly employing risk management techniques can go a long way to minimizing the losses caused by the increased leverage.

Leverage is a term often used to describe trading on margin, and is descriptive of margin trading requirements. Leverage of 50:1 relates to a margin requirement of 2% (1 pided by 50 is 0.02 or 2%). A 2% margin requirement is defined as follows: if you wish to open a new position, then your required to have 2% of the size of that position available within your account as margin. In laymen’s terms: for each dollar of margin available you can make a 50 dollar trade.

Manage Your Risk

To help traders manage the added risk that comes with leverage, a general guideline is that traders should risk no more than 5% of account value on any given trade. Mega Trader FX offers traders flexible lot sizes, which are very helpful in determining risk (dollar) amount that's right for you. First is the option to trade either standard or mini lot sizes. As mentioned before, a standard lot is $100,000. A mini lot is essentially 10% the size of a standard lot, with 1 contract being valued at $10,000 – thus requiring only $200 in margin.

The margin required to place a trade in margin FX can be calculated using the following formula:

Margin = (Contract size / Leverage)

Mega Trader FX margin policy stipulates that your maximum possible risk is your account equity. If the equity in your account drops to 50% of the margin required to maintain your open positions, you will receive a margin call. At this point you will be contacted by Mega Trader FX and have the option to deposit additional funds in order to maintain your open positions or close out existing positions.

Traders can also take advantage of fractional lot sizes, which allow a trader to trade less than 1 lot, as low as 0.01 of a lot. A mini contract size of 0.01 would be a contract valued at $100, requiring only $2 in margin.

Leverage Disclaimer

Leverage is a double-edged sword, and can dramatically amplify your profits. It can also just as dramatically amplify your losses. Trading foreign exchange with any level of leverage may not be suitable for all investors. Trading in FX, CFDs, Options, Futures, Commodities and engaging in financial products carries a high degree of risk to your capital and you can lose more than your initial investment and you should only speculate with money that you can afford to lose. These products may not be suitable for all investors, therefore please ensure that you fully understand the risks involved and seek independent advice if necessary.