Difference Between Maximum Leverage Set by the Broker & Used Leverage
If the set leverage is 100: 1, it means that you can borrow up to 100 dollars for every dollar which you have in your FX account but you do not have to borrow all 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 option set 100:1 your used leverage will be the 50:1 or 20:1 that you have borrowed to make a trade.
Example:
You have 1000 dollars (Equity)
Set 100:1
Leverage Used = Amount used /Equity
1 Contract, $100,000 Lot
If you buy one standard lot which is equal to 100,000 dollars you will have used
= 100,000/1000
= 100:1
0.5 Contract, $50,000 Mini Lot
If you buy one 0.5 lots which is equal to 50,000 dollars you will have used
= 50,000/1000
= 50:1
0.2 Contract, $20,000 Mini Lot
If you buy one 0.2 lots which is equal to 20,000 dollars you will have used
= 20,000/1000
= 20:1
0.2 Contract, $10,000 Mini Lot
If you buy one 0.1 lots which is equal to 10,000 dollars you will have used
= 10,000/1000
= 10:1
In these 3 cases you can see that even though the set is 100:1
The used is 100:1, 50:1, 20:1 and 10:1 depending on the size of lots traded.
So Why not Just Select 10:1 option as the Maximum Leverage? Because to keep within the proper risk management rules it is even recommended that investors use less than this?
This question might seem straight forward but it is not, because when you trade you use borrowed money known A.K.A. Leverage. When you borrow capital from anyone or a bank you must maintain a security or collateral to acquire a loan, even if the security is based on monthly deduction from your salary, the same thing with Forex Trading.
In forex trading the security is referred to as margin. This is the capital you deposit with your broker.
This is calculated in real time as you trade. To keep your borrowed money you must maintain what is known as the required capital (your deposit).
Now if Your FX Trading Leverage is 100:1
When trading if you have $1,000 & use option 100:1 & buy 1 standard lot for $100,000 your margin on this transaction is the $1000 dollars in your account, this is the money that you will lose if your open trade goes against you the other $99,000 that is borrowed, they will close the open trades automatically once your $1,000 has been taken by the market.
But this is if your broker has set 0% Margin Requirement before closing your trades automatically.
For 20% requirement before closing your trades automatically, then your trades will be closed once your trading account balance gets to $200
For 50% requirement of this level before closing your trades automatically, then your trades will be closed once your trading balance gets to $500
If they set 100% requirement of this level before closing your open positions automatically, then your trade will be closed once your trading account balance gets to $1,000: Meaning the trade will close out as soon as you execute it because even if as a trader you pay 1 pip spread your account balance will get to $990 & the needed percentage is 100% i.e. 1,000 dollars, therefore your orders will immediately get closed.
Most brokers do not set 100% requirement, but there are those who set 100% are not suitable for you at all, choose those set 50% or 20% margin requirements, in fact, those who set at 20% are some of the best because the likely hood they closeout your trade is reduced as displayed in example above.
To know about this level which is calculated by your platform automatically - The MT4 Platform will display this as "Margin Requirement", This will be displayed as a percentage the higher the percentage the less likely your trades are to get closed.
For Example if
Using 100:1
If leverage is 100:1 and you transact 1 Mini Lot, equals to $10,000
$10,000 dollars(mini lot) divide by 100:1, your used capital is $100
Calculation:
= Capital Used * Percentage(100)
= $1,000/$100 * Percentage(100)
Margin Requirement = 1,000 %
Investor has 980% above the required amount
Using 10:1
If leverage is 10:1 and you transact 1 Mini Lot, equals to $10,000
$10,000 dollars(mini lot) divide by 10:1, your used capital is $1000
Calculation:
= Capital Used * Percentage(100)
= $1,000/$1000 * Percentage(100)
Margin Requirement = 100 %
Investor has 80% above the required amount
Because when a trader has a higher leverage means that they have more percent above what is required(A.K.A. More "Free Margin") their open 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, they will not trade above 5:1.
These Areas are Shown on The Software Image Below as an Examples:
MetaTrader 4 Platform
