how to understand leverage

Margin Trading

WHAT IS LEVERAGE?

trading-leverage

When it comes to futures trading, the use of leverage is quite normal. Leverage if used correctly and properly will be a very powerful tool. However if used wrongly it can destroy your trading account in no time. Before we start using leverage, we first need to understand what leverage is.

Leverage is an investment/trading strategy that uses borrowed capital in order to increase profit potential of a trade and an investment. The collateral for this borrowed capital is the money you have put in. The use of leverage will multiply your potential trades profit by a certain factor. For example, you have USD 1 million starting capital. You then seek to borrow another USD 2 million. So you now have in effect USD 3 million thus leverage factor of 3. Profit potentials are multiplied by 3.

Comparison: Leverage and Non-leverage

 Non-leverage10% Leverage
Buy 100oz of Gold at USD 1,300 / ozPaid USD 130,000Paid USD 13,000
Gold price rose to USD 1,400 / ozProfit USD 10,000Profit USD 10,000
Gold price fell to USD 1,200 / ozLoss USD 10,000Loss USD 10,000
Need to top-up USD 10,000
Total deposits USD 23,000
Gold price fell to USD 800 / ozLoss USD 50,000Loss USD 50,000
Need to top-up USD 50,000
Total deposits USD 63,000

Margin trading & margin requirements

A margin trading account is a trading account that provides you with borrowed capital and allow you to buy and sell financial instruments greater than the money you put in.

Your deposited money will be used as a collateral for the transactions. This collateral is called margin requirements. To keep holding their positions, traders need to maintain the margin required. Agrodana Futures provide a 100:1 leverage for forex trading. Contract size per lot traded is 100,000 units for regular account.

Margin requirements per lot traded is USD 1,000 for regular account.

What this means is that with as little as USD 1,000, trader can take BUY/SELL position 100x greater. For example, trader buy 1 lot of EURUSD pair at 1.1300. The margin required for this trade is USD 1,000 but the trade size is 100,000 units x USD 1.1300, or equal to USD 113,000. So with just USD 1,000 he/she can trade up to USD 113,000 in this example

Agrodana Futures

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