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Leverage in trading helps traders in the ever-changing realm of forex to control a bigger position with a rather limited capital commitment. But with this advantage also a vital idea: margin. Managing risk and keeping control over your trading positions depend on an awareness of margin's workings.
Margin is the money a trader must deposit to open and keep a leveraged position. It serves as collateral for the broker to help to offset possible losses. Your margin need is just a small percentage; funding the whole trade value is not necessary.
If your broker provides 1:100 leverage in trading, for instance, you only need 1% of the total trade value to open the position. With just $1,000, you can thus control a $100,000 trade. The currency pair traded and the leverage ratio will affect the margin needed.
Margin relates directly to control of risk. It affects your exposure to margin calls, a warning from your broker indicating your equity is running low and your position may be closed automatically if not changed. It also determines how much of your capital is locked into active trades.
Traders must thus routinely check their margin level and free margin with instruments such as a forex margin calculator or a forex leverage calculator. These guarantee better risk judgments by helping determine the precise margin needed before making a trade.
Leverage multiplies gains and losses. Though it sounds appealing, higher leverage raises risk. Based on their trading strategy, capital, and risk tolerance, experienced traders thus often advise using the best leverage for forex. Lower leverage, say 1:10 or 1:20, is advised for beginners to help to control possible losses.
At FinFly Markets, we offer sophisticated calculators to complement your trading decisions: