Leveraged contract trading is a hallmark of the forex market, allowing retail investors with smaller capital to participate in the world's largest financial market. While often associated with forex, leveraged contracts are also common in futures trading.
For those new to leveraged trading, here’s a simple comparison with traditional stock investing:
Suppose Stock A is priced at $60 per share. To buy one lot (1,000 shares), an investor would need $60,000. Once the transaction is complete, the investor owns the stock.
In leveraged trading, however, the investor enters into a contract with a broker. Using leverage, they can hold a buy contract for the same stock without full ownership. This means they don’t need to put up the full $60,000—only a fraction of that amount as margin.
The contract size can be as small as a few hundred dollars. When Stock A rises, both the traditional stockholder and the leveraged contract holder profit.
A few key points about contracts:
- If an investor is bullish on asset X, they can open a buy contract.
- If bearish on asset Y, they can open a sell contract.
- Brokers define contract specifications, including size and terms. To make trading more accessible, many brokers now offer micro and mini contracts.
This type of trading is known as a Contract for Difference (CFD). CFDs allow traders to speculate on price movements without owning the underlying asset. By using leverage, brokers lower the capital barrier, making CFDs popular among beginners.
To trade CFDs effectively, it’s essential to understand key concepts like leverage, margin, and margin level.
What Is Leverage?
Leverage enables traders to control a larger position with a relatively small amount of capital. It's a tool that amplifies both gains and losses.
Brokers offer varying leverage ratios, which can be fixed or customizable. Commonly, leverage ranges from 20:1 to 1000:1. Many international brokers provide 100:1 to 500:1, while some regional brokers may offer lower ratios, such as 33:1.
For example:
- With 100:1 leverage, a trader can control $100,000 with $1,000.
- With 30:1 leverage, the same position requires $3,333.
Before 2018, higher leverage was widely available. However, regulatory changes in many jurisdictions forced brokers to reduce maximum leverage levels to enhance investor protection. Today, choosing a regulated broker—even with lower leverage—is a safer approach for most traders.
What Is Margin?
Margin is the amount of money a trader must deposit to open and maintain a leveraged position. It acts as a security deposit.
In forex, a standard lot represents 100,000 units of the base currency. Contracts are also available in smaller sizes:
- 1 lot (standard) = 100,000 units
- 0.1 lot (mini) = 10,000 units
- 0.01 lot (micro) = 1,000 units
Examples:
- 1 lot of EUR/USD requires 100,000 EUR in margin.
- 1 lot of USD/JPY requires 100,000 USD.
- 1 lot of GBP/AUD requires 100,000 GBP.
It’s important to note that margin is not a fee. It is returned to the trader once the position is closed, assuming no losses have occurred.
When combined with leverage, the required margin is reduced:
- 30:1 leverage: 1 standard lot requires 100,000 / 30 ≈ 3,333 units.
- 100:1 leverage: 1 standard lot requires 100,000 / 100 = 1,000 units.
- 400:1 leverage: 1 standard lot requires 100,000 / 400 = 250 units.
Smaller contract sizes further reduce margin requirements. This flexibility allows traders with limited capital to participate in forex markets.
What Is Margin Level?
Margin level (or margin ratio) is a key metric that indicates the health of a trading account. It helps traders understand how much of their capital is currently in use and how much is available for new trades.
In platforms like MT4 or MT5, traders often see the following terms:
- Balance
- Equity
- Margin
- Free Margin
- Margin Level
Balance
This is the total amount of money in the trading account, excluding any open positions.
Equity
Equity is the current account value, including unrealized profits or losses from open positions:
Equity = Balance + Floating Profit/Loss
Margin
Also known as “used margin,” this is the amount currently held as collateral for open positions.
Free Margin
Free margin represents available funds for new trades:
Free Margin = Equity – Margin
Margin Level
Margin Level = (Equity / Margin) × 100%
This percentage indicates how much buffer a trader has before facing margin calls or liquidation. A higher margin level means more safety, while a lower one signals higher risk.
What Is Liquidation?
Liquidation (often called a “margin call” or “stop-out”) occurs when a trader’s margin level falls below a threshold set by the broker—usually 30% or 50%. At this point, the broker automatically closes some or all open positions to prevent further losses.
Common reasons for liquidation include:
- Sustained losses that reduce equity.
- Overleveraging—using too much margin relative to account size.
To avoid liquidation, beginners should:
- Maintain a margin level above 1,000%.
- Use stop-loss orders on every trade.
- Avoid overleveraging.
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Frequently Asked Questions
What is a good margin level?
A margin level above 1,000% is considered safe for beginners. Below 100%, you may be unable to open new trades. Below 30%, liquidation risk increases.
Can I change the leverage on my account?
Most brokers allow traders to adjust leverage within regulatory limits. Lower leverage reduces risk but requires more margin per trade.
How do I calculate margin before trading?
Many trading platforms have built-in calculators. You can also use the formula:
Margin = (Trade Size × Contract Size) / Leverage
What happens if my margin level is too low?
You may receive a margin call alert. If the level continues dropping, the broker will begin closing positions automatically.
Is high leverage always dangerous?
Not necessarily. While high leverage increases risk, it can be managed with strict position sizing and stop-loss orders.
Can I avoid liquidation without depositing more funds?
Yes, by closing losing positions or adding winning positions that increase equity. However, prevention through risk management is better than reactive measures.
Conclusion
Understanding margin level is essential for anyone involved leveraged trading. It acts as a gauge for financial stability within your trading account. By maintaining a healthy margin level, using stop-loss orders, and avoiding excessive leverage, you can protect your capital and trade more confidently.
Always remember:
- Monitor your margin level regularly.
- Understand your broker’s liquidation policy.
- Prioritize risk management over potential returns.
With these practices, you can navigate the forex market more safely and sustainably.