Margin and Leverage

Brokerage firms can offer up to 200:1 leverage, this mean a 0.5% move can equate to a 100% shift in the traders account. One mistake that most traders make is to have a jackpot view of the markets when offered this level of leverage. It is prudent to remember that leverage is a double edged sword where amplified gains can also become to amplified losses.

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Leverage

A FOREX trade is commonly placed using leverage this is offered in three levels of lot sizes.

1. a standard lot (100,000 units)

2. a mini lot (10,000 units)

3. a micro lot (1,000 units)

For example; when buying 1 standard lot of the AUD/USD quoted at 0.8743/0.8746, then the trader is buying 100,000 Aussie dollars and selling short 87,460 US dollars. Therefore the incremental move of the counter currency in 1 standard lot will return approximately $10 ($1 for mini lot)

Margin

Brokers will offer up to 200:1 leverage, which means 2 x 1 standard lot. This can be very damaging without proper risk management. When trading with leverage a traders account will use a certain percentage as margin, i.e. the amount drawn from your broker account and placed with the exchange or bank to use as a buffer for losses. A standard lot pair usually uses a $500 margin where a mini lot may use only $50. If the account falls below the required margin the trade will be automatically liquidated.