Understanding leverage and margin calculations

May 29, 2009

How to calculate margin and leverage.

I mentioned leverage and margin yesterday and I’d like to complete the explanation today.

The effect of leverage on your account is like a magnifying glass. If you’ve got 100:1 leverage and your initial capital is $1,000 this means your margin level will be at 100,000%. Let’s say you place a trade for 0.1 (one mini-lot) of NZDUSD which uses $63.75 of margin (nzdusd is currently at 0.6375) this is what you’ll see:



Now, if your leverage was 200:1, this means the cost of the trade would be half of the above, or 31.88. See how this affects your margin level:



You guessed it, it’s now twice as much.

So, how is all this calculated?



Your BALANCE is your initial capital + any closed trades (positive and negative).
Your EQUITY is your balance + your current profit or loss.
As we’ve seen, your MARGIN is the amount it costs you to enter a trade, based on your leverage and which pair you’re trading.
Your FREE MARGIN is your balance minus your used margin + your current profit or loss.
And your MARGIN LEVEL is your equity divided by your margin.

Profitable week

Well we’re finishing off the week (and the month) in good profit at + 1,240 :



Here is a close-up of GBPJPY.



I had some technical problems during the night (got disconnected) which causes a false impression of gaps. Anyway, GBPJPY is our winner at over +300 pips and apart from a trade just barely taken (after I reconnected), along with a fledgling gbpchf, all are nicely in profit.

Let’s now see what June brings next week. We’ve still got a few hours before markets close but we’re off to visit friends. Have a GREAT week-end all and see you at market open on the first of June !