Leverage and Margin Trading Explanation and Examples

Margin required : It is the sum of money your energies broker requires from you to open a position. It is expressed in percents.

Equity : It is the total sum of trading capital you have in your account.

Used margin : amount of money in your account which has already been used up when buying a energies contract, this contract is the one that is displayed in the open trades. As a trader you cannot use this sum of money after opening a trade because you've already used it & it's not available to you.

In other terms, because your energies broker has opened up a trade transaction for you using the trading capital you have borrowed, you must sustain this usable trading margin for your account as a security to allow you to continue using this energies leverage he has given you.

Free margin : amount in your account that you can use to open new trade positions. This is the sum of money in your account that has not yet been leveraged because you have not yet opened a transaction with this money - this is also very important for you as a investor because it enables you as a trader to continue holding your open transactions as will be explained below.

However, if you over use leverage, this free margin will drop below a certain percentage at which your energies broker will have to stop out all of your transactions automatically, leaving you with a big loss. The broker at this point automatically closes all your open trade position because if your trade positions are left open broker would lose the money you will have borrowed from them.

This is why you should always make sure you've a lot of free margin. ToIn-order-to do this never trade more than 5 percent of your energies trading account, in fact two percent is recommended.

Difference Between Trading Leverage Set by Broker and Used Leverage

If the set energies leverage is 100: 1, it means you can borrow up to 100 dollars for every dollar you've, but you don't have to borrow all of the 100 dollars for every dollar you've, but you can decide to borrow 50:1 or 20:1. In this case even though the leverage ratio option set 100:1 your used energies leverage will be the 50:1 or 20:1 that you have borrowed to make a trade transaction.

Example:

You have $1000 dollars (Equity)

Set 100:1

Leverage Used = Amount used /Equity

If you buy energy lots equal to 100,000 dollars that as a trader you will have used

= 100,000/1000

= 100:1

If you buy energies lots equal to 50,000 dollars that you will have used

= 50,000/1000

= 50:1

If you buy energies lots equal to 20,000 dollars you'll have used

= 20,000/1000

= 20:1

In these three cases you can see that even though the set is 100:1

The used is 100:1, 50:1, 20:1 depending on the size of energies lots traded.

So Why not Just Choose 10:1 option as the Maximum Trading Leverage? Because to keep within proper risk management rules it is even recommended that traders use less than this?

This question might seem straight forward but it's not, because when you trade you use borrowed money known A.K.A. Trading Leverage. When you borrow capital from anyone or a bank you must maintain a security or collateral to acquire loan, even if the security is based on the monthly deduction from your salary, same thing with Energies.

In energies the security is known as margin. This is the trading capital which you deposit with your broker.

This is calculated in real time as you trade. To keep your borrowed money you must sustain what is known-asreferred-to-as the required trading capital (your deposit).

Now if Your Energy Leverage is 100:1

When trading if you have $1,000 & use leverage option 100:1 & buy 1 standard lot for $100,000 your margin on this transaction is $1000 dollars in your account, this is money that you will lose if your open trade transaction moves against you the other $99,000 that is borrowed, they will stop out the open trade transactions automatically once your $1,000 has been taken by the market.

But this is if your energies broker has set 0% Energies Margin Requirement before closing out your trades automatically.

For 20 percent prerequisite before closing out your energies transactions automatically, then your trades will be closed out once your trading account balance gets to $200

For 50% requisite of this level before stopping out your energies positions automatically, then your trade transactions will be closed out once your account balance gets to $500

If they set 100% requisite of this level before stopping out your open positions automatically, then your trade will be closed once your trade account balance gets to $1,000: Meaning trade will close out as soon as you open it because even if you pay 1 pip spread your trading account balance will go to $990 & the needed percentage is 100% i.e. 1,000 dollars, therefore your orders will immediately be closed out.

Most brokers don't set 100 Percent requirement, but there are those who set 100% aren't suitable for you at all, select those set 50% or 20 percent margin prerequisite, in fact, those brokers that set at 20% are some of the best because the likelyhood they close out-out your trade position is reduced as shown in examples above.

To know about this level which is calculated by your platform automatically - The MT4 Energies Software will illustrate this as "Energies Margin Requirement", This will be displayed as a percentage higher the percentage the less likely your positions are to get closed out.

For Example if

Using 100:1

If energies leverage is 100:1 & you trade energies lots equal to $10,000

$10,000 divide by 100:1, your used capital is $100

Calculation:

= Capital Used * Percent(100)

= $1,000/$100 * Percent(100)

Energies Trading Margin Requirement = 1,000 %

Investor has 980 % above the required amount

Using 10:1

If energies leverage is 10:1 and you transact energies lots equal to $10,000

$10,000 dollars divide by 10:1, your used trading capital is $1000

Calculation:

= Capital Used * Percent(100)

= $1,000/$1000 * Percent(100)

Energies Trading Margin Requirement = 100%

Investor has 80% above the required amount

Because when one has a higher energies leverage means that they have more percentage above what is required(A.K.A. More "Free Energies Margin") their open energies transactions are less likely to get closed. This is the reason why traders will choose the option 100:1 for their account but according to their risk management rules, these traders will not trade above 5:1.

These Areas are Shown on The Software Screen Shot Below as an Example:

MT4 Energies Software