Margin Trading on Forex and CFDs

Published:5 November 2019 Updated:4 January 2024

Everyone in the Forex community is familiar with the term “leverage”. Everyone has heard of it, but, unfortunately, only a few understand what leverage and margin are, CFD contracts and how these parameters affect trading. That’s what we’re going to talk about today.

Margin Trading: What is it?

We will try to answer this question simply and clearly, even for beginners. Margin trading (i.e. the use of leverage) is exactly the tool, thanks to which everyone forex trader gets the opportunity to enter into transactions in volumes that will be many times greater than his own capital.

That is, the trader, taking advantage of margin trading, uses a small percentage of his money when making a deal, but has the right to count on increased profits.

Roughly speaking, the margin is the ratio of trader’s funds to the total amount, which is expressed as a percentage.

Pros and cons of margin trading, risks

Based on the above, it is logical to highlight the advantages that trade with the use of margin:

  • It is allowed to trade large lots, which increases the likelihood of increasing their own income (while personal capital can be quite modest);
  • Regardless of the currency in which the trader opened his account (Open a forex demo account), he gets the opportunity to trade on any instruments;
  • There are a number of particularly expensive assets on the market. It is margin trading that allows you to work with them without being limited by the size of your own capital.

But here, too, there are pitfalls. Opportunities for margin trading relax traders (especially beginners). Having got carried away with trading on credit funds, a person can make a number of fatal mistakes that will lead to complete drainage of the deposit. And then, as in a circle: deposit-slush-replenishment-replenishment. And if there is no time to break out of this vicious circle of constant lending, then the full bankruptcy is not far away.

What is the only recommendation you can give here? Perhaps there is only one: always be aware of the increased risks and learn as soon as possible to use in trading stop-losses – a special tool for limiting losses.

How is the margin calculated?

In fact, there is nothing complicated about calculating margin. To do so, it is necessary to divide the volume of a specific transaction by the amount of leverage, and then multiply by the current quote of the currency. The obtained result is exactly the sum that will go to the broker’s pocket in case of unsuccessful transaction (forex brokers rating).

We are not even going to give specific examples of calculations here, because every serious broker has taken care of that in advance. As a rule, a special calculator is already placed in the trader’s account, where you only need to substitute the parameters of a specific deal.

Trading without leverage: is it real?

Definitely, the use of leverage in trading is not a requirement. But you will make a profit only in those cases when:

  • you have large amounts of capital at your disposal to open a deposit. And, believe my word, the amount should be much more than a few thousand American rubles. Only in this case you will be able to enjoy adequate profits;
  • you’ve learned to catch sharp movements and you’re good at fundamental analysis. In this case the requirements to the initial deposit sum are somewhat reduced, because you can catch 100-200 points of profit in one transaction at the news if the situation is favorable.

That is, trading without the use of leverage is available from a technical point of view, but you need to have serious funds and professional trading skills. In this case, you can’t even count on serious profit figures in percent. 0.5-0.7% of the deposit per month is the real data on the trading with the leverage 1:1. And these results are more suitable for large participants of the foreign exchange market with millions turnovers, but not for an ordinary trader.

Shoulders of Credit: What are they?

And now let’s briefly review the options of leverage that can be provided to the average trader.

  • 1:1. We wrote about trading without leverage above, so we won’t repeat it. Let us just say that not every broker offers such an opportunity. And in order to open one single deal of 1 lot without any leverage it would take you as much as 100 thousand Euros. Moreover, if that trade will make a loss, you won’t be able to open another position for any instrument.
  • 1:20. This size of leverage means that the amount of the deposit is reduced by 20 times when opening a deal. In other words, if to take the same example with 100 thousand bucks, in this case the broker will freeze only 5 thousand instead of the whole deposit.
  • 1:500, 1:1000 – these leverages are designed for people with minimal deposits. The price for 1 lot in this case is only 200 bucks (if you take a leverage of 1:500) and 100 bucks (if you take a leverage of 1:1000).

Choice of leverage: a range of brokers

What leverage options can a trader count on? As a rule, modern brokers adapt for people who do not have serious sums of money. This is expressed in two parameters:

  • Reduced minimum deposit requirements (well, if you do not have $ 100 to open an account, why are you even interested in Forex?)
  • the list of credit shoulders is expanded.

For example, the Amarkets broker The possibilities of margin trading are amazing. Traders are offered to trade with a leverage of 1:1 (yes, that’s the trading without leverage designed for serious players with big capitals), as well as at 1:1000 (such proposal is designed for beginners in the field of currency markets with relatively modest sums).

Such a variety of proposals allows each trader to choose the leverage in which it will be most comfortable to trade.

To summarize

What is the conclusion that can be drawn at the end of the day? Of course, leverage is a real salvation for those who want to or have already started trading on the currency market, but do not have the required amount of own funds.

The possibility of margin trading is used by almost every trader, regardless of their experience and level of professionalism. The only thing that changes is the amount of leverage: the bigger own deposit, the smaller leverage will be provided at the end of the day. And, of course, working with leverage and their choice is one of the main points in learning how to trade the market.

And once again, let us remind you that leverage should be used judiciously. Only then will they serve you well.

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