Thread: Margin Trading and Leverage FAQ

Margin Trading and Leverage FAQ

Please click on the appropriate link below to view the answer to your question:

Margin and Leverage

• What is leverage and margin? Click here.
• Why trade on margin (or why use leverage)? Click here.
• What leverage does FXCM offer? Click here.
• Why does FXCM encourage lower leverage? Click here.
• How can I change my leverage (or margin)? Click here.

Margin Calls and Money Management

• What is a margin call? Click here.
• How much can I lose? And more importantly, why ask? Click here.
• What do I monitor to avoid margin calls? Click here.
• Why does FXCM close all positions during a margin call? Click here.
• How much is required to open a position? Click here.
• How do I determine PIP cost? Click here

If you have additional questions about how leverage works, please post your question and we will reply with an answer!

What is leverage and margin?

Leverage and margin are very important concepts to understand, because they can get you in trouble pretty quickly if not used properly. That being said, if applied properly, it can increase the profitability of your trading strategy.

The terms ‘leverage’ and ‘margin’ refer to the same concept, just from a slightly different angle. When a trader opens a position, they are required to put up a fraction of that position’s value ‘in good faith’. In this case, a trader is said to be ‘leveraged’. The amount that is required to be put down is the ‘margin requirement’. This margin requirement is often referred to as a ‘good faith deposit’ because the trader generally gets that entire amount back when they close the position. We say generally because it may not be the case in the event of a margin call, details of which can be found by clicking here (Margin Trading and Leverage FAQ).

For anyone who wants the actual definitions, here they are:

Leverage: The degree to which an investor is utilizing borrowed money, or the ratio of the trade size compared to the amount the trader put aside to open the position.

Margin: The amount of equity that a trader must set aside in order to maintain open positions. This amount is a percentage of the total value of the contract.

What does that mean to me?

Technically, when trading forex, you are using margin to trade on leverage. You can state it in this manner: when you open a contract or ‘lot’ as they are called, you put down a portion of its value as margin (margin percentage: 2%, 1% 0.5%, etc). You can also state that you opened that 10K lot size trade with leverage (leverage amount, 50:1, 100:1, 200:1, etc).

Another key point is that the margin needed to open a trade is a requirement of trading, not a cost of trading. If a trader is trading on margin (with leverage) and the position moves against them, the loss would be greater than if the trader was not trading on margin (with leverage). The take-away here is that margin/leverage magnifies both gains and losses.

Here is example using USD/JPY and how the margin is calculated:

1. You have to take the contract value. Let’s use a USD/JPY 10K trade

2. That contract is worth 10,000 USD – since that is the first (base) currency in the pair.

3. Then you multiply by the margin requirement:

a. At 0.5% margin (200:1 leverage): you multiply $10,000 USD by 0.005 (which is 0.5%) and get $50.

b. At 1% margin (100:1 leverage): you multiply $10,000 USD by 0.01 (which is 1%) and get: $100.

c. At 2% margin (50:1 leverage): you multiply $10,000 USD by 0.02 (which is 2%) and get $200.

How do I know how much margin/leverage I have?

That depends on your country of residence. FXCM is regulated in many places around the world, by various regulatory bodies, and each of them are slightly different.

For FXCM US accounts, the maximum leverage available is 50:1 leverage (2% margin) on the majors, and 20:1 leverage (5% margin) on the exotics. For a full list of margin requirements, please click here.

For FXCM UK and FXCM AU, we offer 200:1 leverage (0.5% margin) on all currency pairs. For a list of margin requirements, UK clients please click here, AU/NZ clients, please click here.

Where can I see how much margin is required to open my trade?

On the Trading Station platform (if you are on MT4 click here (MT4 FAQ) for more information) the Simple Dealing Rates window will show you how much margin (MMR) is required to open a trade. Keep in mind that these are for 10K lot size trades.

US account:



UK account:



AU/NZ account:



If you have additional questions about how leverage or margin work, please post your question and we will reply with an answer!

Back to the Margin Trading and Leverage FAQ

Why trade on margin (or why use leverage)?

A major benefit to the FX market is that it offers some of the highest leverage (lowest margin) of any financial product. This means that you have the ability to open positions significantly larger than in the equities or fixed income (bond) markets.

You can see in the image below that you can open a 10K lot size EUR/USD position with only $300, or a 10K USD/JPY position with $200.



Are there risks to trading with higher leverage?

Yes, there are. Do keep in mind that this is a double-edged sword: while high leverage can magnify your gains, it will also magnify your losses.

Let’s use some examples here. You have made 3 successful trades so far, each on a 10K EUR/USD (1 PIP = $1) trade, and booked 30 PIPs each for 90 PIP total, or $90. Now, your next trade you decide to make a 100K trade, where each PIP is worth $10. On this trade, you lose 10 pips (10 PIPs X $10/pip = $100 loss). Now, your winning ratio is 75% (3 profitable trades, 1 losing trade), however your account has a net loss of $10 due to over-leveraging the last position.

How can I learn more about using proper money management techniques? Click here (Lower leverage = better money management - DailyFX Videos) for some help!

If you have additional questions about how leverage or margin work, please post your question and we will reply with an answer!

Back to the Margin Trading and Leverage FAQ

What leverage does FXCM offer?

FXCM offers flexible leverage on our forex trading accounts. Below are images of the simple dealing rates window, where the MMR column displays the margin required to open a 10K trade:

For FXCM US accounts, the maximum leverage available is 50:1 leverage (2% margin) on the majors, and 20:1 leverage (5% margin) on the exotics. For a full list of margin requirements, please click here (Updated 2.0% USD Margin Requirements on April 29, 2011).



For FXCM UK and FXCM AU, we offer 200:1 leverage (0.5% margin) on all currency pairs. For a list of margin requirements, please click here (Updated 0.5% USD Margin Requirements on 29 April, 2011).



For FXCM UK and FXCM AU, we offer 200:1 leverage (0.5% margin) on all currency pairs. For a list of margin requirements, please click here (Updated 0.5% USD Margin Requirements on 29 April, 2011).



The high degree of leverage is a popular attraction to many forex traders, and most of our clients utilize the default leverage on their account.

If you have additional questions about how leverage or margin work, please post your question and we will reply with an answer!

Back to the Margin Trading and Leverage FAQ

Why does FXCM encourage lower leverage?

One of the main reasons that new traders lose money is because they over-leverage their account by opening too large of a position, too many positions, or a combination of both. When you use excessive leverage, a few losing trades can quickly offset many winning trades. To clearly see how this can happen, consider the following example:


Scenario: We have four different traders trading on different levels of effective leverage.

Question: What happens to Trader A account equity when the USD/JPY price falls 100 pips against him?

Answer: Trader A loses 41.5% of his / her account equity.

By using lower leverage, Traders B, C, and D drastically reduce the dollar drawdown of a 100 pip loss. Please keep in mind that it is not uncommon for currency pairs to range at least 100 pips a day. By over-leveraging his account, Trader A has lost almost half of his equity with just one trade. We believe that using 10:1 effective leverage on an account is a good general rule of thumb, or never having more than 1K of open exposure for every $100 of equity in the account.

Does lower leverage really work?

FXCM’s experience in Hong Kong, where significantly lower leverage levels are mandated by law, suggests lower leverage results in more successful trading. As another example, many professional traders use up to 8:1 leverage and typically much less. The reason to use low leverage is to make sure that that a losing position does not make a significant negative impact on the overall account.


How can I use lower leverage?

The DailyFX.com Research and Education team has created a variety of trading videos to help you identify trading opportunities using lower leverage. To learn more about money management and the benefits of trading with lower leverage, log into the DailyFX+ Trading Course. Once you are logged in simply click on "Money Management" on the left.

What is more important, the margin requirements on the account or the effective leverage applied to the account?

Keep in mind that the margin requirements on your account is not so much as important as the effective leverage that is applied to the account. As mentioned here at FXCM we believe that using no more than 10:1 effective leverage on an account is a good general rule of thumb in order not to over leverage the account, or never having more than 1K of open exposure for every $100 of equity in the account. Let's use a numerical example in order to better understand this concept.

Let's say that there is $5000 in an account. If you are following the 10:1 effective leverage rule then that means that you are not going to open more than 50K it total positions at any given time. A few examples of this include but are not limited to not opening more than:

• One 50K trade at once.

• Two 25K trades at once.

• Five 10K trades at once.

If there is 50K in total open positions on a $5000 account, if you are using no more than 10:1 effective leverage then more positions will not be opened until some are closed out.

Please click here to read an excellent article on effective leverage written by Jeremy Wagner, our valued Lead Trading Instructor. It's one of a series of articles written on client profitability called: Building a Better Wheel: Incorporating Profitability Statistics.


Based on my position sizes and trading style, it doesn't seem like have enough equity to maintain 10:1 effective leverage. How do I deposit funds?

Please click on the link below that corresponds what type of account you have for more information about depositing funds:

Standard Account Deposit FAQ (Deposit FAQ) | Micro Account Deposit FAQ (Deposit FAQ's)

If you have additional questions about how leverage or margin work, please post your question and we will reply with an answer!

Back to the Margin Trading and Leverage FAQ

How can I change my leverage (or margin)?

When it becomes available again, you will be able to do so at our account management website: www.myfxcm.com It has been temporarily disabled due to the margin changes in the US.

For US clients, the leverage is set to 50:1 on the majors, and 20:1 on the exotics. For a full list of margin requirements, please click here.

For UK or AU clients, please follow these steps to change the margin on your account.

Please open www.myfxcm.com on your computer. When here, enter your live account information as indicated below.



If you do not have your user name or password, please click on Forgot Login/Password? button to reset them. Click here (Trading Station II Login Help) for a visual walk through of resetting the password.

When logged in, click on the Change-Margin Request link.



On this page, you will be able to change your margin on the drop-down menu indicated below.



You will then see the request confirmation page.



Please allow 1-3 business days for processing the request. When finished, please be sure to log out.



Why does FXCM encourage lower leverage?

We have many resources to help your trading strategy, and determining the best leverage for you. Please click here (Lower leverage = better money management - DailyFX Videos) to see our money management videos, or click here (Margin Trading and Leverage FAQ) to see an example of over-leveraging an account, and the pitfalls of doing so.

If you have additional questions about how leverage or margin work, please post your question and we will reply with an answer!

Back to the Margin Trading and Leverage FAQ

What is a margin call?

Technically, a margin call is when your Usbl Mr (Usable Margin) reaches zero. What this means is that the equity in your account (funds in addition to the margin deposit) have decreased to zero and your positions are closed automatically.

Can you give me a good real-life example?

Absolutely! Let’s say you are renting an apartment, and FXCM is the building owner. We inform you that the security deposit is $1,000 and monthly rent is $1,500. We both agree and sign the contract. You, as the tenant will pay the $1,500/month rent, and we will maintain the building. This security deposit is a requirement of renting (trading), not a cost of renting (trading).

Now, at the end of the 12 months, as long as you kept the apartment clean and paid the $1,500/month, you will get the $1,000 back. However, if you stop paying the rent or leave things broken, you will likely get back less than the $1,000 deposit.

It is the same idea in Forex trading. If you have additional funds (Usbl Mr – Usable Margin) in your account, there will be no issue. If you do not have additional funds, the account will be margin called and as much of your deposit (margin) returned as possible.

I got margin called, why do I still have funds in my account?

Let’s use this screenshot to illustrate exactly what happens.



You will see that the Usd Mr is $7,500. In the event that this position moves against me to use up the rest of the $42,179.87 in the account, then all positions are automatically closed. Now, there should be about $7,500 left in the account – we say ‘about’ because of the position size and the chance that the exact price that would get me out with precisely $7,500 may or may not be available when the margin call occurs.

If you have additional questions about how leverage or margin work, please post your question and we will reply with an answer!

Back to the Margin Trading and Leverage FAQ

How much can I lose? And more importantly, why ask?

It has been said that good traders ask how much they can make, while great traders ask how much they can lose.

One of the greatest concerns traders have about leverage is that a sizable loss could result in owing money to their broker. At FXCM, your maximum risk of loss is limited by the amount in your account. All accounts are tracked by our "Margin Watcher" feature. With the Margin Watcher feature, if account equity falls below margin requirements, the FXCM Trading Station will trigger an order to close all open positions at current market rates. FXCM has a policy that if your account has a negative balance, we will automatically credit the account back to zero. We do this so you can fund your account and get back to trading as soon as possible.

How do I manage my trades?

We provide many ways for you to manage your positions. The most common ways to do so is to use stop and limit orders on your trades.

Please click here (FXCM Trading Station II FAQ) for information (including screen shots) on how to place a stop or limit on the Trading Station II.

Please click here (FXCM Trading Station II FAQ) for information (including screen shots) on how to get out of a trade.

Where can I find out more about money management?

We have many resources to help your trading strategy, and assist in determining proper money management for you. Please click here (Lower leverage = better money management - DailyFX Videos) for our money management videos, or click here (Margin Trading and Leverage FAQ) to see an example of over-leveraging an account, and the pitfalls of doing so.

If you have additional questions about how leverage or margin work, please post your question and we will reply with an answer!

Back to the Margin Trading and Leverage FAQ

How do I monitor and avoid margin calls?

Margin calls can be monitored in the accounts window of the Trading Station II platform.



In this image, you see 3 columns that are circled.

The Usd Mr is the used margin that you have put down to hold the positions open. Click here (Margin Trading and Leverage FAQ) for more information on margin and leverage.

The Usbl Mr is the usable margin you have left in your account, to either sustain against losses or to open new positions.

The Usbl Mr, % is the percentage of usable margin (Usbl Mr/Equity or 42,179.87/49,679.87 = 84.9%) that your account has left before a margin call. When this percentage gets to zero, all your positions will be closed (margin called) because the account has insufficient equity to support the open positions.

I got margin called, but I still have funds in my account, what happened?

Margin calls happen when all additional funds (those beyond the Usd Mr – Used Margin) are depleted. The additional funds are those that were put aside to hold the positions open. In the following image, the Usd Mr is $7,500, and most likely what your account would have when a margin call occurs.



Let’s say that this position moved against me by $42,179.87 (or just under 422 PIPs with this 1,000K position, being $100 per PIP) and my Usbl Mr gets to zero. The positions are all liquidated at the best available rate, and I am left with about $7,500 in the account.

I was margin called, but I do not have the entire margin back, what happened?

When an account is margin called, the positions are closed at the best available rate. If the rate that would get you out with 100% of your margin is not available, your trade will execute at the next best price. Let’s use an example here.

I have $500 in my account. I open a long 10K EUR/USD trade at 1.3500 (requiring $300 margin, since I’m in the US). So, I have Usd Mr of $300, and Usbl Mr of $200.

On this trade, each PIP is worth $1.00, since it is a 10K EUR/USD trade. Now, the market rate is currently 1.3310, and I am down $190. There is a news release, USD interest rates are better than expected, and the EUR/USD drops from 1.3310 to 1.3270 (30 PIPs beyond where I’d be margin called).

Now, my account should have been margin called at 1.3300, but since that price was technically non-existent, the position is closed at 1.3270. My account balance now is $270. I lost the first $200 from the position moving against me 200 PIPs (at 1.3300), and another $30 due to the news event’s gapping (to 1.3270).

This is how it is possible to get back less than 100% of the Usd Mr on a trade during a margin call.

If you have additional questions about how leverage or margin work, please post your question and we will reply with an answer!

Back to the Margin Trading and Leverage FAQ

Why does FXCM close all positions during a margin call?

All positions are closed to reduce the chance of your account going into a negative balance. If your account does have a negative balance, we have a policy that will automatically credit your account back to zero.

FXCM closes all positions (instead of the biggest loser, or largest trade) because we do not want to make trading decisions for you. Clients have the ability to use stops and limits to decide how to manage positions, and reduce the likelihood of a margin call.

Do you have anything that would help me with this?

Yes we do! Click here (Lower leverage = better money management - DailyFX Videos) to see our money management videos and learn about the double-edged nature of trading on margin (or with leverage).

If you have additional questions about how leverage or margin work, please post your question and we will reply with an answer!

Back to the Margin Trading and Leverage FAQ

How much is required to open a position?

The margin required to open a trade is available on your Trading Station platform. Click on the Simple Dealing Rates window in the upper left of the Trading Station, and look at the MMR column.

These are margin requirements on a 200:1 leverage account (currently available through the UK or AU).



These are margin requirements on a 50:1 leverage on majors and 20:1 on exotics account (currently the maximum available in the US).



How are margin requirements calculated?
This is a very common question that we get, and using an example is usually best.

1. You have to take the contract value.
a. Let’s use a EUR/USD 10K trade.

2. That contract is worth 10,000 Euro’s – since that is the base (first) currency in the pair.
a. You can multiply the number of Euro’s by the exchange rate (let’s say 1.4000) to find the number of dollars – 10,000 Euro’s X 1.4000 rate = $14,000 USD.

3. Then you multiply by the margin requirement:
a. At 1% (100:1 leverage): you multiply $14,000 USD by 0.01 (which is 1%) and get: $140.
i. FXCM has an added buffer to allow for the rate to move, but keep the MMR consistent.

b. At 0.5% (200:1 leverage): you multiply $14,000 USD by 0.005 (which is 0.5%) and get $70.
i. FXCM has an added buffer to allow for the rate to move, but keep the MMR consistent.

c. At 2% (50:1 leverage): you multiply $14,000 USD by 0.02 (which is 2%) and get $280.
i. FXCM has an added buffer to allow for the rate to move, but keep the MMR consistent.


Here is another example using USD/JPY:

1. You have to take the contract value.
a. Let’s use a USD/JPY 10K trade.

2. That contract is worth 10,000 USD – since that is the base (first) currency in the pair.
a. Let’s say the exchange rate for USD/JPY is 80.00. To find the contact value in Yen, simply multiply the exchange rate by contract size: 10,000 (size) X 80.00 (rate) = 800,000 JPY.

3. Then you multiply by the margin requirement:
a. At 1% (100:1 leverage): you multiply $10,000 USD by 0.01 (which is 1%) and get: $100.

b. At 0.5% (200:1 leverage): you multiply $10,000 USD by 0.005 (which is 0.5%) and get $50.

c. At 2% (50:1 leverage): you multiply $10,000 USD by 0.02 (which is 2%) and get $200.

d. NOTE: since the first pair in the quote is USD, the MMR does not have a built in buffer (assuming you have a USD denominated account).

I hope this helps with some questions you may have, and if you would like to know more, please let us know!

If you have additional questions about how leverage or margin work, please post your question and we will reply with an answer!

Back to the Margin Trading and Leverage FAQ

How do I determine PIP cost?

At FXCM we display as much information as possible to you on the Trading Station II platform. One of these pieces of information is the PIP cost. This is visible in the Advanced Dealing Rates window and the Simple Dealing Rates window:





How do I calculate pip cost?

PIP cost is somewhat complicated to calculate, but let’s go through it step-by-step. First, we need to establish some general guidelines:
1. The base denomination of the account is USD
2. Each lot size is 10K or 10,000 units
3. A PIP is the 4th decimal on all pairs, except JPY, where it’s the second decimal.

Now, we will calculate the value of one PIP on a EUR/USD 10K trade. We start with 10,000 and multiply that by 0.0001 (since that is the 4th decimal and exactly 1 PIP). 10,000 * 0.0001 = 1 unit of the second (or cross) currency listed. This means every PIP is worth $1 on EUR/USD in a USD denominated account.

Let’s say you are using a GBP denominated account to trade EUR/USD. Simply take the value of 1 PIP of EUR/USD, which is $1 USD, and divide that by the rate for GBP/USD. We are dividing here because a pound is worth more than USD, so we know the answer has to be less than 1. With GBP/USD at a rate of 1.5500, we get: 1 / 1.5500 = £ 0.64516. This means in a GBP denominated account, each PIP on EUR/USD is worth £ 0.64516, with GBP/USD trading at 1.5500. As soon as GBP/USD moves, the value of each PIP on EUR/USD (in that GBP denominated account) will change.

Here is another example. Let’s go back to the USD denominated account. Now we are trading USD/CHF using a rate of 0.9655. Again, we start with 10,000 and multiply that by 0.0001 (since that is the 4th decimal, and exactly 1 PIP). 10,000 * 0.0001 = 1 unit of the second (or cross) currency listed. This means every PIP is worth 1 CHF on USD/CHF in a USD denominated account. From here, we take that 1 CHF and divide by the exchange rate of 0.9655 (since USD is currently more valuable than CHF). 1 / 0.9655 = 1.04. Meaning that every PIP on USD/CHF at 0.9655 is worth $1.04 in a USD denominated account. Keep in mind that if the USD/CHF rate moves, the PIP cost will change accordingly, however the calculation remains the same.

If you were using a CHF denominated account, each PIP would be worth 1 CHF regardless of rate, because that is the cross (second) currency in the pair, and is how the PIP value is determined.

Finally a JPY example. We are still using a USD denominated account, and are trading USD/JPY. USD/JPY is currently 83.10. Now, we take a 10,000 position size, and multiply by 0.01 (Since this is a JPY pair, the PIP is the second decimal) and have a value of 100. This means that for every PIP (second decimal) movement on USD/JPY, that is equal to 100 JPY. Now, we need to convert those 100 JPY to USD. To do so, we take 100 and divide by the USD/JPY rate (since USD is currently more valuable than JPY). 100 / 83.10 = $1.20 USD per PIP with USD/JPY at 83.10. Keep in mind that if the USD/JPY rate moves, the PIP cost will change accordingly, however the calculation remains the same.

This information is displayed in the Advanced and Simple Dealing Rates window, as indicated in the images above.

Now, if you are holding positions through significant movements, let’s say you buy USD/JPY at 83.00 and sell at 90.00 in a USD denominated account, the PIP cost is changing the entire life of the trade. This is taken into consideration when calculating the P/L on the trade. So, the PIP cost you see in the dealing rates window is the PIP cost at the current rate, however would not necessarily be the same PIP cost at the opening of your position.

If you have additional questions about how leverage or margin work, please post your question and we will reply with an answer!

Back to the Margin Trading and Leverage FAQ

Hi

I'm new in FX trading and is still trying to adjust my knowledge from stock trading to FX.

Here's my question: When I used to trade M'sian stock using leverage, e.g. 4:1, on a trade requiring MYR1k margin, I was required to liquidate the trade before T+4 settlement day, else I would need to pay the entire MYR4k.

Is there similar settlement requirement in leveraged FX trading when one is holding onto the trade for long period, assuming there is no margin call within that period?

Thank you for your post daniel1wk!

The settlement is fundamentally similar to equities trading, however there are some notable differences. The best answers would be available at our Margin Trading and Leverage FAQ section. This will answer your questions about minimum margin requirements, leverage available, and margin calls.

Thank you again for your post, and if you have additional questions, please feel free to email me, post them here or on the Margin/Leverage FAQ section.