About Leverage and Margin

Here is some information on leverage and margin that may be helpful to you.

200:1 leverage will allow you to use less of your capital by allowing you to put less down on margin to open a position than if you used 100:1.

As taken from a chat I had with FinFx ECN is that they will will provide you with 100:1 leverage upon opening an ECN account. If you want 200:1, you have to request it in writing and state: 1) what is your general strategy 2) pairs traded 3) size of lots used and 4) if positions are held over the weekend or not.

My guess is that they may grant you 200:1 if you: 1) scalp or have trades that last only a few hours 2) trade a highly liquid pair like EURUSD 3) use proper lot sizes in relation to your balance or available equity 4) do not hold positions over the weekend and 5) have a substantial balance or deposit to withstand drawdown.

With respect to your questions about having higher leverage. Higher leverage allows you to use less of your capital when 1) opening a position thus providing you with more available equity to either open more positions and/or 2) allow more breathing room for any open positions you may have.

However having more leverage does not mean you should go overboard and open positions too large because then you run into the possibility of margining out your account due to over leveraging your account. That is why is very important for you to be very highly aware of the lot sizes you are using.

Also you always need to remember that if you use too large of a lot size for the balance that you have in your account, that you may be violating strict money management rules such as risking more than 1% per trade for the balance you have.

For example, let say you open a Megadroid trade at 1 mini lot with FinFx ECN and a balance of $3,000.

Let's calculate what your risk per trade is according your balance of $3,000 and see if that falls within the 1% risk per trade rule.

If the stop loss is 100 pips and we use 1 mini lot, we then stand to lose $100 if we get stopped out.

What is the risk to our account with that one losing trade?

$100/$3,000 = .03 or 3%

In my opinion, I would say that risking 3% would be the absolute maximum for this robot.

With respect to the topic of margin requirement for a 1 mini lot trade in an account that carries 100:1 leverage would be calculated as follows:

For EURUSD 1/100 = .01 x 10,000 units x 1.3000 = $130

Remember if the price of EURUSD goes up to 1.5000 in the future, the margin requirement or amount used as collateral to place a 1 mini lot trade of EURUSD will be $150. If you
place a 2 mini lot trade, the margin requirement or amount that your broker sets aside from your balance will be $300.

I am sure that you are slowly absorbing this information through repetition. And I can't stress enough how important it is know and employ the proper use of leverage and lot sizes. In fact, I would have to say that 95% of the traders out there lose money due to these two reasons alone.

In fact, I would go so far as to say that many traders who have winning strategies margin out and/or blow out their accounts due to violating strict money management rules or principles.

Hope all this information helps you to stay out of trouble. :)

I enjoy sharing this information with you because it continues to remind me of how important this part of trading really is.

Contact me if you have any questions or comments.

How to Calculate Margin Requirements

If you are trading nano lots and have 1 nano lot open on the EURUSD and 3 nano lots open on the USDJPY, how would you calculate the margin requirement using 1:100 leverage.

Remember a nano lot has a contract size of 100 units of the base currency (the first currency listed in the pairs name).

Here is how I calculate the margin requirement:

If EURUSD is presently trading at 1.416 then the margin requirement to place a
1 nano lot trade of EURUSD at 1.416 is $1.41.

Required Margin for EURUSD = 100 units x 1.41 x 0.01 = $1.41 USD.

For pairs beginning with USD (USD/CAD, USD/CHF, USD/JPY, etc.):
Contract size (in the base currency)/leverage = margin required (in the base currency)

100 USD/100 [1:100 leverage]=$1.00 USD to place a 1 nano lot trade
Required Margin for USDJPY = 300 units x 1.00 x 0.01 = $3.00 USD.
(or 300/100= $3.00)

So $1.41 + $3.00 = $4.41 is the total margin requirement for the
4 positions you would have open.

You can read more info about margin requirements here at these two sites:

http://thismatter.com/money/forex/leverage-margin-pips.htm
http://forexmagnates.com/calculating-margin-by-interbank-fx/

Hope this has helped you.

For more information on automated trading, please visit http://WealthSecrets.com

Take care and I hope to collaborate with you in the future.

Mike