Clickalgo Knowledge Center
Return to Website

What is Leverage & Margin

Probably one of the first words you will learn when you start trading using cTrader is leverage and margin as entire forex and CFD industry to some extent lies upon the use of margin and leverage. In trading, leverage allows the forex broker to open a speculative position for you which is a much larger amount of money than you have at your disposal if you wanted to trade directly without the use of a middleman broker as the funds lent to you from the broker whose services you are using for this financing and if a position is left open overnight the client will owe interest.

 

Leverage 

Leverage is expressed in ratios like 1:50, 1:200, 1:500 in the cTrader platform and if your broker blocks £1,000 from your trading account to open a 100,000 EURUSD position, it means you are using a 1:100 leverage, so you control £100,000 with only £1000

 

Advantages of Leverage

If the market moves in your favour and the £100,000 investment increases to £110,000 than the return would be 10% which (£10,000 profit /  100,000 initial investment), but this would imply you are using just 1:1 leverage and since you are using 1:100 the broker will block 31000 just to open the position, so your real return is a huge 1000% profit (£10,000 profit / £1000 initial investment).

 

Disadvantages of Leverage

Using leverage can also be very dangerous and potentially blow your account and if you hold a £100,000 EURUSD position and the market moves against you by just 1%, your initial £1000 deposit will be blown and gone as your return would be -100% or (£1000 loss / £1000 initial investment). So as you can see margin can work in your favour to make big money fast, but it can also work against you to take it away, we recommend that you also trade within your financial capabilities.

 

Margin

If you refer to the leverage example above where a position with a leverage of 1:100 would have £1000 blocked from the trading account, this value is the margin that is required to open the position in the first place.

The word margin is often also referred to as used margin, but there is also another term that is used which is free margin and this refers to the amount that is not currently utilized for trading purposes and is equal to the difference between the account equity and the (used) margin. If there is more than one open position, the total margin will be the sum of all the used margins for every single open position.

You will find that with the cTrader platform the margin is expressed as a percentage of the full amount of the position (0.25, 1, 2, 4.5 etc) and It can vary significantly between brokers and between and various symbols, also the more liquid a financial instrument is, the lower the margin and the higher the leverage a broker will require from its clients for it.

 

cTrader's Leverage & Margin

If you want to go into more detail about how leverage & margin is used with the cTrader trading platform than visit Spotwares dedicated help page.