Leverage and Margin are the two most widely used terms in Forex option trading. According to the general dictionary, Leverage means having a power to control a huge amount of currency, without using any or little of own money. The rest of the money is borrowed here. On the other hand, the meaning of Margin is to have an edge over something.
However, Leverage and Margin in Forex trading have different definitions. We will discuss about these two in this article and will try to help you understand the terms. As a novice Forex trader, you should have knowledge about Leverage and Margin so that you can get success in Forex trading. We will also use similar examples in this article to make you understand the differences and connection between two.
Let’s take an example. In Forex trading, a Forex trader can control an amount of $100,000 with a deposit of only $1,000. The Leverage here is 100:1, in ration form. This means that the Forex trader is controlling $100,000 with only $1,000. Here, the margin is the $1,000 that the Forex trader has to give to be able to use the leverage. In Forex option trading, the margin actually works as a deposit that a Forex trader has to use while opening a position with the broker. The margin is also required to maintain the position of the trader. The margins are usually described in the form of percentage of the positions entire amount, like the Forex broker may need 1%, 2% or .5% margin.
You may also come across few other margin terms while doing currency trading. The terms like “margin required”, “margin call”, “account margin”, “used margin”, “usable margin”, etc. are different from each other and have different usages. We will discuss about these terms in this article as well so that you can understand them better.
The term, “margin required” means the margin in the form of percentages which the Forex brokers require for opening a position. All the money in the Forex trading account of the Forex trader is termed as “account margin”. The term “used margin” stands for the amount of money that the Forex trader owns. This margin remains in a “locked up” status and cannot be touched to keep open the current position. The amount of money that the Forex trader still has in the trading account and can use to open other positions is known as “usable margin”. On the other hand, the “margin call” means the situation, when the required equity of the trading accounts goes below the usable margin. In this situation, the dealing desk closes the existing open positions at market price.
