Margin and leverage can be confusing at first but they are very easy to understand.
・ Margin is the amount of money you need in your account in order to guarantee a trade you would like to make. You can think of it as a deposit on the asset you are trading.
・ Leverage is the amount your broker allows you to borrow, in order to multiply the spending power of your own capital (you pay no interest on this loan).
So, if your broker offers you 1:100 leverage and you have 1000 in your account, then you effectively have 100,000 to trade with.
100 000 1:100 1000
Leverage and margin are interconnected. The more leverage you use, the less margin you require.
For this reason, leverage can also be expressed as required margin.
So, if your broker requires you to post 1% margin for a trade, it’s the same as using 1:100 leverage. This is because you are only required to post 1/100th of the value of the trade, meaning that your investment in this specific trade is multiplied by 100 (100 / 1 = 100).
2% required margin = 1:50 leverage (100 / 2 = 50)
5% required margin = 1:20 leverage (100 / 5 = 20)
0.5% required margin = 1:200 leverage (100 / 0.5 = 200)
While leverage multiplies the value of your investment, it can also magnify your losses if the market goes the other way.
At FxPro we offer guaranteed negative balance protection, preventing your account from going below 0, so regardless of how much leverage you are using you cannot lose more than you invested. However in order to protect your account from going to 0 in the first place it is wise to have sufficient funds in your account in order to protect your open positions from price volatility.