The concept of leverage is omnipresent in forex trading. It is a mechanism allowing all forex traders to take positions, long or short, clearly greater than the funds at their disposal. Leverage is in the form of a ratio that all brokers display on their trading platform.
Leverage ranges from 50: 1 to 400: 1 in the forex market, with the standard value being 200: 1. In other words, with a leverage of 500: 1, you can take a position 200 times; greater than your actual capital. In practice, the leverage effect reflects the fact that a broker borrows investment capital from traders.
This mechanism allows you to reap more substantial profits if you perform well in forex trading. In return, the leverage effect also generates significant losses in the event of unfortunate decisions on the foreign exchange market.
Leverage And Margin Concept
Given the risks represented by trading currencies with the leverage effect, brokers put in place a series of limitations, aimed at minimizing losses and thus hedging loans granted to traders. Thus, brokers set an investment margin, calculated according to the capital of each trader, so that the latter does not lose more than what he has in his account in the event of a losing trade.
The other hedging device is none other than the “margin.” The broker freely determines the amount of the initial margin. Its value generally varies depending on the broker. Traders are, nonetheless, free to deposit a larger margin than what the broker requires, to increase its hedging capacity and hold larger positions.
The usefulness of the margin call is (margin call คือ, which is the term in Thai) indicated with each transaction. The broker then requires the trader to have at least, the equivalent of a percentage of the lot processed in his account. The minimum required by most brokers is 1%. If this condition is not met, the broker proceeds to a margin call, asking the trader to deposit the amount intended to cover his positions.