Margin and Leverage; How does it benefit my trading, how is it calculated and how does it affect 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.
Margin
Margin is the funds that your broker requires you to have available as your trading account balance to open a leveraged position.
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.
Look at your brokers market information sheet for more details.
Leverage
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. This indicates that you can open a position 100 or even 400 times the value of your collateral needed to open and maintain a position.
Here is an example: Using a leverage of 1:100, you would only need R1,000 in your account, to maintain an R100,000 position. Technically you would need some change to absorb the spread and keep you from getting a margin call as soon as you open the trade.
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 extremely high leverage.
NOTE: Professional traders don't seek high leverage! Have a think as to why.
