Opening a trade with $100 and a leverage of 20 will equate to $2,000 investment

If, however, the trader has losses and his equity drops below 50% of used margin on metatrader 4 and avaoptions accounts, the broker will shut down the client’s position(s), in a “margin call”.

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Guide to Leverage, opening a trade with $100 and a leverage of 20 will equate to $2,000 investment.

This is what we have discussed above as the amount your broker requires you to put down as a ‘security deposit’ to control a trade position in the market. It is often expressed as a percentage. For instance, if you use a leverage level of 100:1, your margin requirement is 1%. If you use leverage of 400:1, your margin requirement is 0.25%.

Guide to leverage

What is leverage in trading?

Leveraged trading is a powerful tool for CFD traders. It can help investors to maximise returns on even small price changes, to grow their capital exponentially, and increase their exposure to their desired markets. But it is worth noting that leverage can work for or against you. While you stand to earn magnified profits when asset prices go your way, you also suffer amplified losses when prices move against you

When you are trading with leverage, you put a ‘small amount’ down, but you get the chance to control a much larger trade position in the market. The small amount is what is referred to as ‘margin’. The amount of leverage a broker offers depends on the regulatory conditions that it complies with, in any/all of the jurisdictions it is allowed to offer trading services in.

With leveraged trading, the trader need only invest a certain percentage of the whole position. This can change depending on how much leverage the broker offers, how much leverage the trader would like to implement, and it also relies heavily on the regulatory authorities which are tasked with overseeing the online trading industry in that jurisdiction.

Also, traders use leverage depending on their level of experience, investing goals, their appetite for risk, as well as the underlying market they are trading. In most cases, it is professional traders that tend to use leverage more aggressively, whereas new and less experienced traders are generally advised to use leverage with caution. Also, conservative traders will tend to use the minimum level of leverage possible, whereas traders with a high appetite for risk can use leverage flexibly.

The type of market traded can also dictate the amount of leverage traders can use. Volatile markets, such as gold and bitcoin, should be traded with minimal leverage, whereas less volatile assets that do not post wide price fluctuations, such as the EURCHF pair, can be traded with higher leverage levels.

The leverage ratio is a representation of the position value in relation to the investment amount required. At avatrade, forex traders can trade with a leverage of up to . This however, varies depending on your jurisdiction as well as the asset class you are trading.

Consider this: with leverage of 400:1; you can control a $100,000 trade position in the market with just $250! This would mean that a 1% positive price change in the market will result in a profit of $1,000 (1% of $100,000). Without leverage, a 1% positive price movement will result in a profit of only $2.5 (1% of $250). This means that your trade positions and the resulting profits/losses are multiplied 400 times. This is why it is often stated that leverage is a double-edged sword. With trading leverage, profits are magnified, but losses can equally be devastating.

When trading with high leverage, it is very easy to lose more than your capital. But at avatrade, we offer guaranteed negative balance protection which means that you can never lose more than you have in your trading account balance.

What is margin trading?

As explained above, ‘margin’ is the amount of money a broker allows a trader to put down to trade a much bigger position in the market. It is essentially a security deposit held by the broker. When holding trading positions, price changes in the market will lead to changing margin conditions as well. On most platforms, information on the varying margin conditions will be displayed in your trading account. Here are what the various margin definitions and other terminologies mean:

Account balance

This is the total amount available in your account as your trading capital. It is essentially your trading bankroll.

Margin requirement

Used margin

This is the amount of money held as ‘security’ by your broker so that you can keep your open trade positions running. The money is still theoretically yours, but you can only access it after the open positions are closed.

Usable margin

This is the money in your trading account available for opening new trade positions in the market.

Margin call

A margin call is a notification by your broker that your margin level has fallen below the required level. This is a dreaded call (notification) for traders. A margin call occurs when losses of an open trade position exceed (or are about to exceed) your used margin. When you receive a margin call, you are essentially being asked to add more funds to your trading account to sustain open trades, failing which the broker will proceed to automatically close the open position. For instance, a margin call level of 20% means that your broker will send the margin call notification when your open trades have sustained losses of over 80% of your account balance.

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Pros and cons of leveraged trading

Pros of leverage

Boosts capital. Leverage boosts the capital available to invest in various markets. For instance, with a 100:1 leverage, you effectively have control of $100,000 in trading capital with only $1,000. This means that you can allocate meaningful amounts to various trade positions in your portfolio.

Interest-free loan. Leverage is essentially a loan provided by your broker to allow you to take a bigger position in the market. However, this ‘loan’ does not come with any obligations in the form of interest or commission and you can utilise it in any manner that you wish when trading.

Magnified profits. Leveraged trading allows traders to earn magnified profits from trades that go in their favour. Profits are earned out of the trade position controlled and not the margin put down. This also means that traders can earn substantial profits even if underlying assets make marginal price movements.

Mitigating against low volatility. Price changes in the markets usually occur in cycles of high and low volatility. Most traders like trading highly volatile markets because money is made out of price movements. This means that periods of low volatility can be particularly frustrating for traders because of the little price action that occurs. Thankfully, with leveraged trading, traders can potentially bank bigger profits even during these seemingly ‘dull’ moments of low volatility.

Trading premium markets. Leverage makes it possible for traders to trade instruments that are considered to be more expensive or prestigious. Some instruments are priced at a premium and this can lock out many retail investors. But with leverage, such markets or assets can be traded and expose the average retail investor to the many trading opportunities they present.

Cons of leverage

Amplified losses. The biggest risk when trading with leverage is that, like profit, losses are also amplified when the market goes against you. Leverage may require minimal capital outlay, but because trading results are based on the total position size you are controlling, losses can be substantial.

Margin call risk. The dreaded ‘margin call’ from your broker occurs when floating losses surpass your used margin. Because leverage amplifies losses, there will always be an ever-present ‘margin call’ risk when you have open trading positions in the fast and dynamic financial markets.

Example of leverage trading – retail clients

Let’s look at another example, this time with gold. The price of one troy ounce of gold is $1,327. The trader believes the price is going rise and wishes to open a large buying position for 10 units.

The full price for this position will be $13,270, which is not only a large amount to risk, but many traders do not possess such amounts.

With a 20:1 leverage offered by avatrade, or a 5.00% margin, the amount will decrease substantially. Meaning that for every $20 of worth in the position, the trader will need to invest $1 out of his account, which comes to $663.5 only.

Open your leveraged trading account at avatrade or try our risk-free demo account!

Margin call – how it works

In order to employ leverage, a trader must have sufficient funds in his account to cover possible losses. Each broker has different requirements. Avatrade requires a retail trader to possess equity of at least 50% of his used margin for metatrader 4 and avaoptions accounts.

Going back to the example above, the position’s original value is $13,270; for both metatrader 4 and FX options trading accounts. With leverage, the trader invests $663.5 of his capital, and if he has 50% of this used margin in equity, i.E. $331.75, his positions will be kept opened.

If, however, the trader has losses and his equity drops below 50% of used margin on metatrader 4 and avaoptions accounts, the broker will shut down the client’s position(s), in a “margin call”.

On avaoptions all the client’s positions will be closed, while metatrader 4 will shut down the largest losing position first, and will continue to close positions until the equity level returns above 50% of the used margin.

Example of leverage trading – pro/non EU clients

In this example, we’ll take the price of one troy ounce of gold at $1,327. The trader believes the price is going to rise and wishes to open a large buying position for 10 units. The full price for this position would be $13,270, which is not only a large amount to risk, but many traders may not possess such amounts. Using the 200:1 leverage offered by avatrade, or a 0.50% margin, the amount will decrease substantially. Meaning that for every $200 of worth in the position, the trader will need to invest $1 out of his account, which comes to just $66.35.

Margin call – pro/non EU clients

In order to employ leverage, a trader needs to have sufficient funds in his account to cover possible losses. Each broker has different requirements, and avatrade requires a pro/non – EU trader to possess equity of at least 10% of his used margin for metatrader 4 and avaoptions accounts.

Going back to the example above, the position’s original value is $13,270 for both metatrader 4 and FX options trading accounts.

With leverage the trader invests $66.35 of his capital, and if he has 10% of this used margin in equity, i.E. $6.64, his positions will be kept opened.

If, however, the trader has losses and his equity drops below 10% of used margin on metatrader 4 and avaoptions accounts, the broker will shut down the client’s positions.

On avaoptions all the client’s positions will be closed simultaneously, while metatrader 4 will shut down the largest losing position first, and will continue to close positions until the equity level returns above 10% of the used margin.

Leverage trading with avatrade

Avatrade offers many instruments, and each has a different leverage available which can also change based on the trading platform you choose to work with. It is important to make sure you know the available leverage before you start trading.

In order to avoid a margin call always make sure you have enough equity in your account’s balance so you can continue your trades undisturbed.

Finally, it’s worth trying out our avaprotect feature. It is a risk management tool that protects your open positionsif you set it up before you open the trade.

It lasts as long as you want it to, and if your trade is losing upon expiry, you will get all the money back into your account, minus the fee you paid for the avaprotect™ facility.

Leverage main faqs

Because avatrade uses a 50% margin requirement and the use of the margin call your risk of excessive trading losses that exceed the total balance of your account is minimized, but it is not eliminated completely. During a period of extreme volatility, it is possible that a position could move so rapidly against you that it is not possible to liquidate a losing position in time to keep your account balance from going negative. To avoid this, we strongly recommend that you manage your use of leverage wisely.

While leverage and margin are closely interconnected, they are not the same thing. Both do involve borrowing in order to trade in the financial markets, however leverage refers to the act of taking on debt, while margin is the actual money or debt that the trader has taken on to invest in financial markets. So, leverage is referred to as a ration, such as 1:30 or 1:100, which indicates how much debt can be taken on to open a position, while margin is referred to as the actual amount borrowed to create the leverage. For example, with 1:100 leverage you can control $100 of an asset with only $1 in margin.

Leverage is a very complex financial tool and should be respected as such. While it sounds fantastic in theory, the reality can be quite different once traders come to realize that leverage doesn’t only magnify gains, but it also magnifies losses. Any trade using leverage that moves against the trader is going to create a loss that is much larger than it would have been without the use of leverage. This is why caution is recommended until more experience with leverage is gained. This can lead to a longer and more prosperous trading career.

Open your leveraged trading account at avatrade or try our risk-free demo account!

We recommend you to visit our trading for beginners section for more articles on how to trade forex and cfds.

How to calculate leverage, margin, and pip values in forex

Although most trading platforms calculate profits and losses, used margin and useable margin, and account totals, it helps to understand these calculations so that you can plan transactions and determine potential profits or losses.

Important note! The exchange rates used in this article are for illustrative purposes, so the exchange rates themselves are not updated, since it serves no pedagogical purpose. Foreign exchange rates vary continuously, so current exchange rates may deviate largely from what is presented here. Nonetheless, the exchange rates were accurate when the article was written, and regardless of the current rates, the exchange rates used here still illustrate the principles presented in this article, which do not change.

Leverage and margin

Most forex brokers allow a very high leverage ratio, or, to put it differently, have very low margin requirements. This is why profits and losses vary greatly in forex trading even though currency prices do not change all that much — certainly not like stocks. Stocks can double or triple in price, or fall to zero; currency never does. Because currency prices do not vary substantially, much lower margin requirements are less risky than it would be for stocks. Note, however, that there is considerable risk in forex trading, so you may be subject to margin calls when currency exchange rates change rapidly.

The margin in a forex account is often called a performance bond, because it is not borrowed money but only the equity needed to ensure that you can cover your losses. In most forex transactions, nothing is bought or sold, only the agreements to buy or sell are exchanged, so borrowing is unnecessary. Thus, no interest is charged for using leverage. So if you buy $100,000 worth of currency, you are not depositing $2,000 and borrowing $98,000 for the purchase. The $2,000 is to cover your losses. Thus, buying or selling currency is like buying or selling futures rather than stocks.

The margin requirement can be met not only with money, but also with profitable open positions. The equity in your account is the total amount of cash and the amount of unrealized profits in your open positions minus the losses in your open positions.

Total equity = cash + open position profits - open position losses

Your total equity determines how much margin you have left, and if you have open positions, total equity will vary continuously as market prices change. Thus, it is never wise to use 100% of your margin for trades — otherwise, you may be subject to a margin call. Instead of a margin call, the broker may simply close out your largest money-losing positions until the required margin has been restored.

Leverage = 1/margin = 100/margin percentage

To calculate the amount of margin used, multiply the size of the trade by the margin percentage. Subtracting the margin used for all trades from the remaining equity in your account yields the amount of margin that you have left.

To calculate the margin for a given trade:

Margin requirement = current price × units traded × margin

Example: calculating margin requirements for a trade and the remaining account equity

Required margin = 100,000 × 1.35 × 0.02 = $2,700.00 USD.

Before this purchase, you had $3,000 in your account. How many more euros could you buy?

Remaining equity = $3,000 - $2,700 = $300

Since your leverage is 50 , you can buy an additional $15,000 ( $300 × 50 ) worth of euros:

To verify, note that if you had used all of your margin in your initial purchase, then, since $3,000 gives you $150,000 of buying power:

Total euros purchased with $150,000 USD = 150,000 / 1.35 ≈ 111,111 EUR

Pip values

Because the quote currency of a currency pair is the quoted price (hence, the name), the value of the pip is in the quote currency. So, for instance, for EUR/USD, the pip = 0.0001 USD, but for USD/EUR, the pip = 0.0001 euro. If the conversion rate for euros to dollars is 1.35, then a euro pip = 0.000135 dollars.

Converting profits and losses in pips to native currency

To calculate your profits and losses in pips to your native currency, you must convert the pip value to your native currency.

When you close a trade, the profit or loss is initially expressed in the pip value of the quote currency. To determine the total profit or loss, multiply the pip difference between the open price and closing price by the number of units of currency traded. This yields the total pip difference between the opening and closing transaction.

If the pip value is in your native currency, then no further calculations are needed to find your profit or loss, but if the pip value is not in your native currency, then it must be converted. There are several ways to convert your profit or loss from the quote currency to your native currency. If you have a currency quote where your native currency is the base currency, then you divide the pip value by the exchange rate; if the other currency is the base currency, then you multiply the pip value by the exchange rate.

Example: converting CAD pip values to USD

100,000 CAD × 200 pips = 20,000,000 pips total. Since 20,000,000 pips = 2,000 canadian dollars , your profit in USD is 2,000 / 1.1 = 1,818.18 USD.

However, if you have a quote for CAD/USD , which = 1/ 1.1 = 0.90909 , then your profit is calculated thus: 2000 × 0.90909 = 1,818.18 USD, the same result obtained above.

For a cross currency pair not involving USD, the pip value must be converted by the rate that was applicable at the time of the closing transaction. To find that rate, you would look at the quote for the USD/pip currency pair, then multiply the pip value by this rate, or if you only have the quote for the pip currency/USD, then you divide by the rate.

Example: calculating profits for a cross currency pair

You buy 100,000 units of EUR/JPY = 164.09 and sell when EUR/JPY = 164.10 , and USD/JPY = 121.35 .

Profit in JPY pips = 164.10 – 164.09 = .01 yen = 1 pip (remember the yen exception: 1 JPY pip = .01 yen .)

Total profit in JPY pips = 1 × 100,000 = 100,000 pips .
Total profit in yen = 100,000 pips / 100 = 1,000 yen

Because you only have the quote for USD/JPY = 121.35 , to get profit in USD, you divide by the quote currency's conversion rate:

Total profit in USD = 1,000 / 121.35 = 8.24 USD.

If you only have this quote, JPY/USD = 0.00824 , equivalent to USD/JPY = 121.35 , the following formula converts pips in yen to domestic currency:

Total profit in USD = 1,000 × 0.00824 = 8.24 USD.

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INCREASED LEVERAGE ON STOCK CFDS! 20X LEVERAGE NOW AVAILABLE

IQ option has increased the leverage for stock cfds from 10x to 20x. This new investment multiplier (another term for leverage) applies to non-regulated traders (residing outside of the european union) and pro traders from the european union. Although retail traders from the european union do not have access to 20x leverage due to ESMA restrictions, they can luckily still trade with 5x leverage, which is still a good amount of leverage when it comes to stock trading.

YOU CAN CHOOSE BETWEEN 4 DIFFERENT LEVERAGE SETTINGS.

For all the information about the different leverage settings on the different instruments offered by IQ option, please take a look at IQ option multiplier meaning: leverage explained in detail

Stock markets have recently experienced much volatility and this higher multiplier offers a high-risk high-return way of trading for those who want to get the most out of stock price movements.

To find out exactly how to trade stock cfds with IQ option, check out how to trade stock cfds with IQ option - guide & review 2021

With 1:20 leverage, traders can trade pretty large positions compared to the size of their trading accounts. For example, with only $100, a trader can control a stock trade with a notional value of $2000. This exposes the trader to potentially much larger gains (or losses) without having to put down too much cash to open and maintain the position. In this example, the trader can only lose the $100 he invested in the position. Losses cannot exceed the original investment amount.
*traders who use leverage should understand how it works and be aware that an increase in leverage increases risk.

So, let's see, what we have: leverage is a powerful tool for online traders with limited capital. Understand leverage and margin& learn about the pros and cons of leverage in trading. At opening a trade with $100 and a leverage of 20 will equate to $2,000 investment