Forex Courses on Demand

Leverage & Margin – Key Principles Of Forex

Hello, and welcome to this latest edition of courses on demand brought to you by forex dot academy. In this course, we will be discussing leverage and margin. There is, of course, inherent risk when deciding to trade the financial markets. So, just before we begin, please do take a moment to familiarise yourself with the following disclaimer.


So, let’s go straight in, and untack all the real reason behind the risk or the real availability for risk in trading the financial markets leverage, first of all, will have to define what is leverage, and actually, give it a good explanation with. So, me various examples obviously you’re aware as financial traders that there is an element of risk, when trading the financial markets it’s how we tackle it’s how we approached that level of risk in our trading actually will deliver success over the long term. So, we’ll explain that in a lot of detail, then we’ll move on to discussing notional trade sighs when we decide to trade these markets, whether it’s a Forex pair or whether it’s a commodity like gold oil silver perhaps. So, things like coffee cotton there’s always a notional trade sighs how much of the actual commodity or asset are you trading in the real world, and how does that relate to the initial capital that you have on your trading account that then brings us nicely into discussing trading Lots, and that’s really how we assess, and how we attach a level of risk to any position that we love to take, and trade in the financial markets we look at both 0.01 lots, and 0.1 lots, and of course for warm lots, and we can always refer to those as micro-lots many nuts or the full training lots as well. So, we look at that in a lot of detail will then discuss leverage itself as the risk factor, and how that relates to margin on your current really your margin is a good faith deposit for your ability to actually take on. So, risks in the financial market, and then we’ll discuss that actually practically on the trading platform looking at taking on. So, me risky trades taking on. So, me not. So, risky, and I’m really discussing the difference between those positions really, and hired manufacturer training in the markets. So, let’s move on, and what first of all is leverage well within the financial services industry itself hedge funds, and other financial institutions send and receive short term loans to one another, and this is of very large amounts of money. Now, it’s perhaps for a very short time they may lend perhaps at ten million dollars ten million euros to over the weekend perhaps for short term rates or for. So, rt of short term positions just to actually have that extra capital to hold as margin as well this is to allow them to assume more risk and increase the leveraged size of their own positions, and what we refer to this in the financial markets in terms of financial sector trading is gearing up. Now, that it’s actually no different to our own trading as regional traders we – as market participants can gear up by accessing higher levels of capital with which to trade from, and that’s done via the broker this enables retail traders to enter trading the many asset classes that offer leveraged products such as contract for difference okay. So, that would be the more common approach we would look to trade these markets; obviously, there are other products leveraged, such as binary options, and perhaps futures contracts, and perhaps. So, me spread betting accounts as well are often available through the retail traders we prepare contracts for difference just given the structure of the product as a leveraged product as well leverage itself allows traders to increase the buying power of their initial capital in order to profit from smaller fluctuations in the price of a financial security. Okay, this security may perhaps be a futures contract or a global commodity like oil and/or commonly a CFD on a particular forex market like the euro US dollar. So, let’s just reverse back on this, and discuss this in a little detail. So, whether we decide to trade, something like perhaps oil the oil market well, if we think that the price is going to rise in oil we don’t actually look to buy that to actually physically own that commodity, and may be stored in a garage for a period of two weeks until hopefully the price rises, and then we can sell it for a profit no, no as traders as market participants we look to agree with these level of contracts in the market whether it’s futures contract or whether it’s a contract for difference it’s between two parties one agrees to buy one agrees to sell the asset at that price, and they simply speculate on the price that actually that product itself allows us to trade the leveraged product of perhaps a barrel of oil which is maybe too expensive or too difficult for us to actually access.

So, that’s the main point leverage effectively enables traders to actively participate in financial markets that would otherwise be inaccessible or perhaps too costly to trade, and again perhaps a too costly to trading example would be well perhaps. Something like 10000 euros, if you want to trade the notional trade size of 10000 euros you don’t necessarily have the capital for 10000 euros but you want to take advantage of these moves in the markets well leverage will allow you to do that perhaps with the smaller current size of a 500 euros you could maybe access that amount, and given the leverage factor on your account. So, let’s delve into this in a little more detail again to reiterate leverage makes trading in the financial markets more accessible to you, and me okay leverage is essentially the rate of multiplication to which you can trade. So, it’s effectively the multiplier or the risk factor of your trading position I came to use the euro or Forex example it can actually allow us to trade very large sums of money perhaps 20,000 50,000 euros of notional tray actual cash value against the depreciation or an appreciation of that currency, and again from perhaps a smaller amount size of 1000 or 2000 euros. So, we can actually access these markets in such a way to take on leverage, and risk this multiplication of your funds held on deposit allows you to trade bigger size, and access more markets, and leverage allows you to pay less than full price for a trade giving you the ability to enter larger positions than would be possible with your current funds alone. So, that is the same as suggested there just with the financial sector itself, and they want to take on headphones often do this pension funds as well, when they want to trade in the markets will look to the financial services sector for short term money on deposit simply those interest rates, and that’s that’s effectively what LIBOR is for in terms of short-term money lending, if you’re in the UK the London interbank reott effectively for loaning a short term money to another party but the aim is to a gear up for your investment. So, that you have access to larger capital to make the trade perhaps once the trade is performing you can take. So, to profit out of the trade, and within a few days look to give the money back into the financial sector. So, that’s something we can do with a smaller current says we can access these marketplaces, and actually look to trade quite large sums of money in terms of notional trade size. Now, obviously there is risk involved, and not, and we’ll discuss it throughout this webinar the assumption of leverage is an essential product for the retail trader to trade the global financial markets okay the ability to greatly increase notional trades as expands our purchasing power as traders it is absolutely imperative that this acceptance of risk could be understood, and respected, and that is why we have 4x that Academy here of plenty of risk management courses we are big avid advocates of actually trading the markets with a very consistent approach in terms of developing risk management I’m protecting capital, and it’s it’s very much the professional approach in terms of not looking to trade or speculate in a gambling manner with these marketplaces always respect the risk that you’re trading. So, try to explain this in a detail perhaps for the beginner or novice trader there’s perhaps thinking of entering the markets for the first time we can use this example to highlight leverage quite quite well, and the question I would like to pose that do you know any learner driver who takes their driving lessons in a Porsche absolutely not I do not indeed, and that I would assume would be the same answer for many of you learning to trade the financial markets here do you know any learner driver looking to start their lessons by driving a Porsche no I would why would apart from the obvious why would that not be a good idea well it’s the same as leverage that we converted in this manner, if leverage is used incorrectly it can have a devastating effect on your trading account. So, novice traders, what can they often do they could take too much risk, perhaps started an account with 500 euros, and effectively, unfortunately, blow up that account or lose everything, and that’s because they’re taking on too much risk.

So, let’s go back to our Porsche example if we’re looking to start our first ever driving lessons in a Porsche well, I know that it’s quite sensitive to drive; it’s quite speedy it’s quite fast perhaps the gear change is much more difficult than. something more simple to drive a Ford Fiesta it’s just a very dangerous car for a new beginner to learn how to drive. So, let’s look at our training occurrence here, and that might be the same for a 1000 euro current at perhaps four hundred to one leverage well what does that mean, when you actually look to set up an account with a broker, and they offer you different leverage accounts more generally they will offer two hundred or four hundred to one that actually means that you can trade with your 1000 euro account a notional trade says potentially of four hundred thousand euros. So, if you were to hypothetically, if you were to start your first account with one thousand euros, you could effectively take a risk in the financial markets of that amount of four hundred thousand euro. So, if you take the full risk on your account, one hundred cents. So, you can see quite clearly, and quite obviously that that would not be recommended you’re taking on too much risk, and the market really doesn’t have to move against you too much for the year 1000 euros to effectively be wiped out let’s move on to our 1000 euros hypothetically with an 800 to 1 leveraged trading account that has the potential to trade a notional trade size of 800 thousand euros. So, can you see that that is just too much leverage to access, if we’re, if we’re actually looking to trade the full 100 percent risk on our trading account what we want to do is aim to reduce leverage as much as possible, when trading, and learn how to drive in a much more suitable car why is that well it’s simply safer guys it’s simply safer we want to approach the markets with our education we want to develop consistency, and it is true that, when you take on more risk, of course, there is more profit available, but you might have four or five very very profitable trades indeed, and then, if you have no risk or are taking on too much leverage or perhaps no stop-loss you can’t often see those earnings those winnings erode quite quickly. So, trying to develop your idea of leverage trying to take that on board with your risk assumption is always the wisest approach, when deciding to trade these financial markets, let’s discuss notional trade science. Now, a very important factor indeed, and one that is often overlooked by many a financial market participant notional trade size or n TS is the overall position size over-leveraged trade wherein a small amount of investor money can control a much larger position in the markets accurately calculating trade size is a crucial component of risk management strategy what we should do is accurately be aware of the notional trade says for each market you trade. So, what is this really in layman’s terms what does this mean it means we need to know what we’re actually trading, and I don’t mean what market or product are we trading gold, if we’re likely going to be trading the gold market well we know that we’re going to be trading gold as we open the market, and begin to trade what it means what it refers to is, if we are trading gold do we know with our trade says perhaps how many ounces of gold, if we decide to trade perhaps the oil market do we know effectively how many barrels of oil we decide to trade at our given volume, if we decide to trade the US dollar against the Canadian dollar do we know how many US dollars we actually have as a position size, if it’s, if we take a rather large trade size, and we’re in the market trading, and it’s moving five euros per pip, and we think that’s perhaps good if someone wants to turn around, and say you’re actually trading 200 thousand dollars there of actual cash would that shock you. So, these are all the things that actually relate to trade size notional trade size, and the amount of leverage that we were assuming in these markets. So, let’s go through just for. So, me examples here you have a table just jumping in from the right there, and we have first of all forex our forex markets there we have equity indices, for example, the footsie there in the UK, and we can discuss commodities, and we have an I mean we have gold here as the example as well. So, let’s just go through them here in terms of defining the notional trade size for these markets well one standard lot for the forex market sure as you look across either the majors minors are perhaps. So, me more exotic pairs 100,000 of the base currency is your one lot. So, we can see that one standard lot here is our base of 100,000. So, that’s quite a lot that’s a large trade size even by placing that. So, here’s our 100,000 for our one lot a one mini large-size is ten thousand at Euro against the dollar for our base currency, and that is zero point one zero lot, and what we call there is the mini lot, and then what we have is 1 micro lot size, and that is warm thousand of base currency, and that is perhaps rather 0.01 of trade size.

So, you can see it’s quite well defined in terms of looking at the looking at trading the Forex pairs that’s that’s actually the same in terms of input value for the embassies we have a 40 which is simply one index is one, and then obviously the fraction of that is hand, and 0.01 index point is actually 0.01 micro lot size the gold as well considering it’s a commodity we have gold weight in ounces. So, actually, one standard lot in the gold market is 100 ounces of gold. So, we know that I’m not as effectively r1 lot, and one mini lot says there is 10 ounces of gold obviously as the fraction, and then, if we decide just to keep our risk small we want to train to safer how this market appreciate, and depreciate in terms of one ounce of actual weight gold we know that we can trade in 0.01 micro lot for the market. So, very self-explanatory there, but it is actually in position sizing for these trades that you’ll become more accustomed to trading the markets with your risk appetite, and perhaps your strategy sellers. So, perhaps you want to trade one of these markets here with your actual position says, and you’ll need to know then what size you’ll actually look to trade let’s use an indie see here, for example, we want to trade the foot see, and we have an account size of perhaps 1000 euro you’ll often, and do. So, mathematics or. some equation to let you know, and we have obviously a risk management calculator to help our students with this that perhaps um if you want to take a 2% risk on that trade, it might be. Something like 0.04 that you’ll be looking to trade on the actual account. So, this is how we look to a position in the markets with you know our account size relative to the amount of risk we like to assume per trade. So, let’s move on, and I’ll actually look at this honour a trading platform regarding specifically the trading lots of markets. So, here we have our new order, and that is just in the top left of the mt4 platform that is where we look to execute all of these trades, and then we get our order box that will pop up centre screen here then we have the instrument, and here we have the Euro Pound, and it’ll tell you euro versus Great Britain pound. So, obviously, the euro is the first leg of this currency pair, and the pound is the second currency pair. So, when we see this market rise that would dictate to us that the euro is stronger than the pound and, when we see this market fall that would dictate to us vice-versa obviously that the euro was weaker than the pound, and the pound is stronger than the euro during the trading period what we can see here that we have highlighted in yellow is our 0.01 trade lot size micro a lot I know, if you result of our notional trade size again we can see that a 1 lot within this market is relative to 100,000 euros 0.01, therefore, is relative to 1,000 euros of cash to trade from the appreciation or depreciation of this currency pair. So, that’s fineness can you see the difference there that’s absolutely fine in terms of a very small risk trade let’s move across to perhaps looking at. So, me other markets here we have there’s that the Euro Pound again we can actually see a one-load notional trade size again is actually imported into your volume, and that is relative to 100,000 euros of trading in terms of actual cash that you look to trade across this market. So, you can see that’s a huge position to take in these markets, and here we have a US oil WT crude oil, and we have imported into our volume zero point one zero or zero point ten, and that is referred to as a mini lot what does that mean in terms of how many are notional trade size for how many barrels of oil well we know that one lot is one thousand barrels of oil, therefore, the fraction of that zero-point-ten is 100 barrels of oil. So, that’s a relatively a strong position to take in the markets, but it’s within good risk management it would depend on your account size of course but you can see that there is a big difference from your wallet to the zero-point-one lot in terms of trading size on both the cash that will rate relate to on your trading occurred, and the size of the actual market position that you’re taking with 100 barrels there in the market. So, let’s move on to discussing their leverage, and margin, and what that means for our current well the margin requirement is the amount that we take in from your account, and he’ll as a deposit when a trade is opened ok different markets have different margin requirements. So, do be mindful you do need to be careful with the amount of margin, and on requirements that you will need to assume. Some of these trades margin is a part of your net floating balance, whether it is positive profit or negative for loss. So, what does that mean well that simply means, when you start your initial account let’s say you start on the cart with 1000 euro, and you accept one trade, and perhaps at one percent risk as that market moves either positive or negative negatively let’s say for discussion purposes it moves into a profit area, and the profit on the trade is 23 euros then your account size is 1020 three years with your open position. So, the actual floating balance of your margin is actually relative to, and the positions that you have concurrent in the market again on the flip side, if you have 1,000 euros, and for. So, me reason you have a 200 euro negative position well, then your margin will be much less. So, it’ll be 800 margin considering you have a negative position on a current balance margin can become a sizeable amount of your current balance depending on how many trades you have open on the size of those trades. So, what does that mean again well it means that this good faith deposit this margin that you are able to put up in terms of accessing these markets, and looking to trade this risk is actually held on your recurrent I’ve just at that moment you’re in the trade.

So, again let’s use an example of a warm thousand euro account, if we were to help spur take take on five trades in five different markets at the one time that may reflect quite strongly on the actual amount of margin we have left because, as we increase or as we put on each extra trade there will be a certain amount of capital that needs to be locked away as a good-faith deposit in terms of accepting the risk on that trade. So, it’s not always a good idea to perhaps have you know 20 30 open trades at the one time specifically for those smaller occurrences I’m not lead us on to discussing that it can be a barrier to trade. So, if you just think logically about that I’m you have 1,000 euros, and perhaps you’re trading in five-six different markets, and some of those trades are winning and some are losing and Some are perhaps 50 euros, and to the negative well then your margin is gonna be greatly affected by that perhaps you only have 100 euros left of margin which is not good. So, if you decide to take on another trader perhaps see a very good technical service that you do want to take, you might not have the capital, and in terms of actually, and putting out trade on for risk. So, it can become a barrier to trade okay what I want to do is really explain this to you in detail, and practically on the trading platform leverage, and trading risk. So, when we discuss leverage, when we discuss margin, how does not relate to actually our trading risk as financial traders well here we have the euro US dollar here, we have no technical analysis, and I would like to point out this is just our jafx demo current. So, there’s going to be no analysis in this trade, but in terms of looking at more generally, if we zoom in on the price action, we can see that we have reached a bit of a consolidation period above these highs, and lows here. So, we’ve just seen a bit of a pullback with today’s price action. Perhaps this could look to trade further toward the down says. So, what we will do is actually look to sell this market what I’m going to do is to place three trades with different associations of risk or notional trade size or leverage to show you how that may affect your trading account. So, we can just open RM or balance here at the bottom this is our our actual screen to let us know what trade positions that we are in, and what we can actually assume in the markets what I’ll do then is place three similar trades again this is our euro US dollar let us place first of all as we press the order this pops up, and on the other screen there let’s just change this to 0.01, and we’re going to trade the eurodollar again we’re selling this I cannot stick here just to the right of the new order screen, and looking for this market to continue. So, I’ll sell a notional trade size of 1000 euros, i.e., a volume of 0.01 I’m not more get how that trade has been placed there. Now, what we can see straight off the bat is initially we have accepted the trade position it has cost us in terms of the spread of the market which is absolutely fine that’s the cost of doing business in these financial markets we can see that that is effectively costing us not a lot at all the Commissioner has been 0.04 switch for centrally it’s nothing that will really affect our trading over the long run considering we obviously look to become profitable traders, and that the position says itself as the market trades it’s really trading, and with you know 1/2 cent per pip.

So, that’s fine, if the market was to go perhaps 100 pips we might look to make you know in an ‪around 1 to 3‬ euros. So, and what we’re looking for is actual large moves in the market. So, what I can do is just to show you what this actually relates to. Let’s just go back to the platform here, and what we’ll do we’ll modify this order, and we will look to perhaps just pick a price point here for our take profit perhaps 1 2281 1.2 281 as we can put that into our platform we can scroll over, and that will tell us that, if the market rates down from this trade we’re actually looking to make at twelve seventy-two. So, twelve dollars and seventy-two cents. So, that’s absolutely fine. You can see how the risk on this trade is small that, if the market moves down today or over the next two days, we’re looking to make twelve dollars off our trade. So, we’re feeling how are we feeling about this trade quite objective to the trade position we’re not under any pressure, of course, of course, we look to put a stop loss in there which I didn’t do, but that’s always how we approach this markets again this is it the more current really what I’m looking to show you is the effect of leverage on this account. So, let’s move on to actually placing the same trade really we’re going to sell this market again with our new order, and we’re actually going to trade a zero point one. So, there we have placed the exact same trade, and you can see just as I had at the end with my desktop, and again that the second trade has actually taken on a little more leverage, and there’s actually showing us zero-point-six, and it’s moving $0.10 per pip. So, you can see that the spread is actually the risk factor is multiplied we can see that’s affected in the Commission at 0.4 cent, and and then 40 cent for us for our trade, and again as the market moves the risk factor has been multiplied we’ve taken on not one thousand but ten thousand euros of notional trade says, and the market looks to move. So, if the market then trades down to this level, and Hort a profit is there will look to make not twelve dollars, and seventy cents but 127, and dollars. So, you can see it’s been multiplied there. So, let’s just go back again, and not that isn’t a hugest trade but you can see it’s relatively large in terms of what we’re looking to do in the markets perhaps it’s too much for us to trade what is certainly too much for us to trade let’s place the exact same trade again with a 1-0 lot a full lot of currency, and what this is relative to is 100,000 actual euros cash in the markets, and will sell at that price. So, straight away that, we can see that the risk factor has been multiplied we can see not we’re effectively in the same position not that has cost us seven euros for entering the trade we can see the commission for the trade was four euros. Now, four euros is a relatively small amount considering we are looking for a very big move, and obviously we would make quite a sum of money, if we were correct, and this market actually looks to trade to the downside but what we can see is the leverage, and the margin here we have in the current balance of seven thousand four hundred, and thirty-three dollars we only have a margin there of 275 for the current, and the free margin is actually seven thousand. So, we’ve taken a fall 275 dollars from a margin, and that’s quite significant in terms of one two three trade positions with our trade size as well I should point out that forex markets are notoriously cheap to trade as well. So, that’s why they’re often preferred, if you’re looking to trade other assets, that margin would be much more extensive in terms of the margin for capital needed. So, that’s just one example we can see we technically we have at three positions in the market we’re selling the market there or more or less the exact same trade what you can see the risk factor has changed for trade one-two, and three here we can see as the market moves it’s moving in smaller more medium on very large incremental shifts in actual cash itself. So, people react very differently, when trading in this market, and taking on too much risk let’s discuss the webinar then in its review what we discussed was leverage itself, and training to find it with. So, me good explanations we buy. Now, you should know inside out notional trades as what that means for how many perhaps barrels of oil were looking to trade how much currency were looking to trade, and what that means in terms of training Lots on your trading platform we know leverage is the risk factor, and what that really means in terms of margin on your account or the amount of capital needed for placing trades, and how does that relate to you as a trader with your own risk appetite training aids financial markets that’s always the key questions that finishes off our assessment then of leverage, and margin a very very key principle for us as financial traders. So, all that’s left for me to do is thank you very much for joining us on this installment of courses on demand brought to you by Forex Don Academy we do hope to see you very soon, bye for now.   


By Keiran

Forex trader, media, marketing, entrepreneur and father

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