NoaFX Tutorial

3.2 Leverage / Margin Requirements

What is Leverage?

To understand leverage, we have to understand the concept of borrowed money. Let's take a look at a very simple example of something most of us readily own; a credit card.

Your Money vs Borrowed Money

The bank that offers you credit services to facilitate your credit card typically will give you twice the amount of your monthly salary or more. In other words, if your salary is $5,000, your Credit card facilities can finance $10,000.

Now, this is the leverage you have from your bank that offers you the credit card service.

Your Capital vs Trading Capital

In the trading context, for every trading dollar that you fund your capital with, your broker will allow you "borrowed" trading capital based on your leverage.

Leverage with most retail brokers can range from anything between 1:10 to 1:500.

In other words, for a trading capital of $5,000, you can trade for contracts worth $1,000,000 with a broker who offers you 1:200 leverage.

Margin Requirements

With this leverage facility, let us look what our margin requirements are to acquire a contract.

In order to compute this requirement, we need;

  • Price of Currency Pair
  • Volume or Size of Contract (Lot Size)
  • Leverage facilitated by broker

In our example, let us assume that;

  • Price of Currency Pair = 1.6000
  • Volume or Size of Contract = 100k or 1 Standard Lot
  • Leverage = 1:200

Actual Trading Cost: 100,000 x 1.6000

= $160,000

Margin Trading Cost: $160,000 / 200

(With Leverage) = $800

Therefore, you can witness that a contract which would have cost you $160,000 in actual physical value is now possible at $800 only facilitated by the leverage given by your broker.