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Chapter 5, Part IV. Spread, Lots, Leverage/margin and profit/loss – joining all... Page 4

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 15, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

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    MARGIN AND LEVERAGE

    Commander in Pips: You’re absolutely right. Very nice, that you’ve taken care with this question. Now, let shift to Leverage/Margin question. Tell me, how you understand such terms as Margin and Leverage?

    Pipruit: Well, maybe I’m not quite correct in my understanding, but due to your examples and explanation, I have a notion about Leverage as some kind of temporary Loan from a broker. And the terms of this “Loan” equals the time, while I hold my opened position. The value of the loan equals the value of all opened positions excluding the initial margin requirement.

    Margin, in turn, looks like some kind of precautionary balance or security deposit, that makes broker feel himself calm, comfortable and not worried about returning of whole “Loan” by me. Because, if something turns wrong, his software will be able to close my positions before the moment when my trading loss exceeds the initial margin.​

    Commander in Pips: That’s a very thorough reply.

    Additional thoughts about leverage and margin:

    - Each broker requires an initial minimum amount of money for start trading. It is called “initial deposit”, “account margin”, “trading deposit” or something like that. The value of this start-up sum of money could be different and depends on your Broker and trading conditions. But once this amount has been transferred on you trading account – you can start trading.

    - Your initial deposit could be greater than the minimum requirement from the Broker. Say, a broker demands $1000 as initial margin for a trade and you have $3000 in your trading account. That’s fine. Broker will lock just $1000 and allows you to borrow according to leverage ratio. $2000 will be free and could be used to open additional positions. When you close the trade, your broker will unlock your $1000, then add profit or subtract the loss from your trading account balance.

    - ! You should clearly determine all details of margin calculation and mandatory position closing procedure with the Broker before opening an account or placing a trade!
     
    #1 Sive Morten, Dec 15, 2013
    Last edited: Dec 15, 2013
    Nachoga, SandGrain and fran alvarez like this.
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