Margin and Leverage; How does it benefit my trading, how is it calculated and how does it effect my risk exposure?
The Margin requirement is set out by your broker to maintain an open position. Based on the margin, your broker then offers you leverage where they front the difference in order to open any given position. Leverage is a double-edged sword. Yes, you can open bigger volume sizes but it may also put your account at higher risk. The term is called “over-leveraging” as it’s commonly referred to.
Each asset has an indicated margin requirement, a form of collateral by the trader. In order to open and maintain a position, a set amount is indicated as the margin once a position is opened. This amount will be deducted from your free (available) margin. Brokers have their own requirements regarding margin e.g. 0.5%, 0.75% etc.
Leverage, as the word implies, is the ability to leverage an amount bigger than the value of your account. It is normally expressed as 100:1, 400:1 etc. indicating you can open a position 100 and 400 times the value of your collateral needed.
It is important not to always seek the highest leverage as it leads to traders risk too much on a given trade in comparison to their account balance due to an extremely high leverage.