What's the relation of Leverage, Margin and Margin Call? Table of Contents

What is Leverage?

The ratio between the amount of money you actually have and the amount you trade is called leverage.

The equation is usually expressed in 1: X format (where X is a number), for example, 1:30.

Using leverage in trading gives you the opportunity to open larger positions with less capital.

For example, a leverage of 1:30 means that you can trade up to 30 times the amount of the base currency in your account.

The format is correct regardless of what leverage you use.

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What is Margin?

When trading Contracts for Difference (CFDs) with leverage, you need to have a certain amount of credit in your account.

This is your margin (also known as a good faith top-up).

Knowing and calculating your margin requirements before using leverage is important information for good risk management.

Also, understanding this information in advance will help you avoid unnecessary margin calls (see below) that will close your position when the required margin is missing.

Both leverage and margin are intertwined as you need margin to take advantage of leverage.

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What is Margin call?

While trading with leverage on your margin can help increase potential returns on your trading positions, it can also do the opposite and potentially increase your losses.

Margin calls are used by brokers to let traders know when their accounts have been devalued to a certain level, as leveraged trades that move contrary to your forecast can quickly drain your available capital.

If you choose to trade with leverage, it is extremely important that you carefully consider the amount of leverage that you intend to use.

Both successful and unsuccessful positions are compounded and can result in you losing all of your capital.

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