WHAT IS FOREX?
In order to calculate the leverage being used on a certain trading account, you must divide the total value of your open positions by the total margin balance displayed. For example, if you have £20,000 worth of margin in your account and you open two standard lots of EUR/USO (200,000 units of the base currency) for £200,000, your leverage ratio is 10:1 (£200,000/£20,000.) If you have leveraged 400: 1 you can control a large position (£200,000) with a small amount of capital (£500).
Margin is the amount required to open a new Forex position, it is not a fee or a charge to your account. It is an amount set aside, from your free equity, for any new trade. With a £1,000 margin balance in your account and a 1% margin requirement to open a position, you can buy or sell a position worth up to a notional £100,000. This allows a trader to leverage their account by up to 100 times or a le erage ratio of 100:1
The higher the chosen leverage, the higher the available margin percentage on the tradi g account. If you open to many positions, use high lot sizes or leave a trade running in a loss (which is increasing), then the account could fall under the minimum amount required to maintain an open position. If this happens then a margin call' is likely to occur which will require more money to be deposited into the broker account or close the position totally. When the margin percentage falls very low (mostly under 50%), most brokers will automatically cut the trades in loss and you are likely to cry or smash up the computer! Which is not advised so remember to trade safe!
When choosing to work with high leverage you obviously need to be careful and highly aware of how many positions you open at the same time, taking into consideration the balance of your account. For instance, on a 400: 1 leveraged account, 2 standard lots (£20 per PIP) would be too huge for a £2000 account as once the margin has been taken into consideration you would only have around £1300 left on your available equity (around 65 PIPs against you to wipe you out). It is wise to calculate lot sizes in accordance to money management ratios which we get to later on.