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Abstract:Leverage amplifies both potential profits and risks. Understanding how to calculate leverage and margin helps traders manage risks and avoid forced liquidation.
Leverage allows traders to control a larger trading position with a smaller amount of capital, effectively borrowing funds from a broker. Margin, on the other hand, is the amount of money required to open and maintain a position, serving as collateral. It is usually expressed as a percentage of the total trade value.
There are two types of margin:
Used Margin: The amount of capital currently allocated to maintain open positions.
Available Margin: The remaining capital in the account that can be used to open new positions.
For example, if a trader has a total account balance of $5,000 and $3,800 is used margin, then $1,200 remains available for new trades.
The margin calculation formula is:
Margin= (Trade Volume×Contract Size×Asset Price)/Leverage
For example, if a trader wants to buy 3 lots of EUR/USD at an asset price of $1.10 with a leverage of 30:1, the required margin would be:
(3×100,000×1.10)÷30=11,000 USD
Another crucial metric is the margin level, which is calculated as:
Margin Level=(Equity/Used Margin)×100
A higher margin level indicates more available margin relative to borrowed funds, reducing risk. If the margin level falls below 100%, a margin call will be triggered, warning the trader to deposit more funds or reduce positions. If the margin level drops to 50%, the system may forcefully close positions to prevent further losses.
Leverage is a double-edged sword—it can magnify profits, but it also increases the risk of significant losses. For example, if a trader has $1,000 in their account and uses 100:1 leverage, they can control a $100,000 position. However, a 1% unfavorable price movement could wipe out their entire capital.
Therefore, it is crucial to use leverage cautiously. Beginner traders are advised to start with lower leverage (e.g., 10:1 or 20:1) and use stop-loss orders to limit risk. Practicing with a demo account can also help traders gain experience with margin trading before committing real capital.
Disclaimer:
The views in this article only represent the author's personal views, and do not constitute investment advice on this platform. This platform does not guarantee the accuracy, completeness and timeliness of the information in the article, and will not be liable for any loss caused by the use of or reliance on the information in the article.
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