Margin_leverage calculations alpari uk

Beginner Questions
1

hi
I am learning fx on alpari demo.

I have read up on leverage and margin.
they(alpari) say margin requirement is
units of base currency / leverage

so a 0.01 lot trade eur/usd at 3:1 leverage
1000 euros / 3 = 333.3 euros = £290
or is it 3.3 euros = £2.90?

its just ive followed the way they have calculated on their website, but im a bit confused about all this.

I understand that the higher the leverage setting, the lower will be the margin requirement. Correct? Lower the leverage = higher the margin.

example
leverage

  1. 100:1
  2. 500:1
  3. 3:1

1 lot trade eur/usd
100,000 euros / 100 leverage = 1000 euros = £869 margin requirement…?

what is margin requirement for 500:1 leverage trade? 200euros?

[B]what about 3:1 leverage? [/B]

so this will be the initial margin they tie up.
so it has [B]nothing [/B]to do with stop loss distance?
in spreadbetting i have learnt that point/pip value x stop loss = margin.

before i put on an fx trade, what questions should i ask: ?

  • stop loss x pip value = total potential loss
  • the margin requirement required
    …but could total potential loss amount temporarily be increased, margin wise, as the position is losing more…?

i have noticed that say if a specific amount is tied up in margin when opening a trade, when the position gets into more loss, the margin amount tied up is increasing in real time.

please help me understand, and thankyou in advance. :slight_smile:

2

Hello, jonboy

That’s a lot of questions in one post! — Let’s take them in order.

At one point in your post, you mentioned spread-betting. We don’t do spread-betting in the U.S. (where I am), so all of my answers here are based on spot forex trading. If spread-betting is different, you’ll have to get the differences explained to you by somebody else.

In spot forex trading, there are two “kinds” of leverage: the maximum leverage that your broker will allow you to use, and the amount of leverage you actually use. Margin is based on the first kind. Margin is the inverse of the maximum leverage your broker will allow you to use.

So, for example, if your broker will allow you to use UP TO 100:1 leverage, then margin will be 1/100 or 1% of every trade. It won’t matter how much leverage you actually use — the margin amount will be 1% of the notional value of your trade.

Let’s go through an example. You have £500 in your account. Your broker allows you to use UP TO 100:1 leverage. You buy 0.1 lot of GBP/USD (this is a £10,000 position size, or £10,000 notional value). Immediately, we know two things: (1) your broker will set aside £100 of your money as margin (that’s 1% of your position size), and (2) the actual leverage you are using is 20:1 (because your position is 20 times as large as your account balance).

Returning to your question, when you say 3:1 leverage, are you talking about the maximum leverage your broker will allow you to use, or actual leverage used?

If you are saying that your broker will allow you to use UP TO 3:1 leverage, then the corresponding margin amount on a 0.01 lot trade (of EUR/USD) would be 333.3 euro (converted to £ at the current exchange rate, and charged to your account).

On the other hand, if you are saying that 3:1 is the amount of leverage you actually used on this trade, then the margin calculation will not be based on 3:1. It will be based (as always) on whatever maximum leverage your broker allows you to use.

I understand that the higher the leverage setting, the lower will be the margin requirement. Correct? Lower the leverage = higher the margin

Margin = 1 / leverage, and Leverage = 1 / margin. Therefore —

100:1 leverage corresponds to 1% margin

50:1 leverage corresponds to 2% margin

20:1 leverage corresponds to 5% margin, etc.

Generally, in spot forex trading, we don’t “set” the maximum allowable leverage in our accounts. That is set by the broker, as part of his standard conditions. So, when you use the term “leverage setting”, if you’re referring to spread-betting, then you’ll have to get your answer from somebody else.

1 lot trade eur/usd
100,000 euros / 100 leverage = 1000 euros = £869 margin requirement…?

what is margin requirement for 500:1 leverage trade? 200euros?

[B]what about 3:1 leverage? [/B]

In this example (position size 100,000 euro):

100:1 leverage = 1,000 euro margin

500:1 leverage = 200 euro margin

3:1 leverage = 33,333 euro margin

so this will be the initial margin they tie up.
so it has [B]nothing [/B]to do with stop loss distance?
in spreadbetting i have learnt that point/pip value x stop loss = margin.

Correct. Margin can be thought of like “escrow”. A portion of your money (the margin amount) is “set aside”; and (for the duration of your trade), this amount is not available to you to cover losses, to be withdrawn from your account, etc. When your trade is closed, your margin is “returned” to you — that is, it is no longer encumbered or tied up.

The size of your stop-loss (which represents your risk on this trade) does not affect margin.

Again, I can’t help you with spread-betting questions.

before i put on an fx trade, what questions should i ask: ?

  • stop loss x pip value = total potential loss
  • the margin requirement required
    …but could total potential loss amount temporarily be increased, margin wise, as the position is losing more…?

i have noticed that say if a specific amount is tied up in margin when opening a trade, when the position gets into more loss, the margin amount tied up is increasing in real time.

Brokers typically use the terms “available margin” and “used margin”, and during the dynamics of an open trade, these amounts vary as the price of the underlying instrument varies. Generally, it works like this:

When you have no open positions, your entire account balance is “available margin”. Let’s say you have £500 in your account, and no open positions. Your “used margin” is zero, and your “available margin” is £500.

When you open a position, your broker sets aside margin (based on allowable leverage). Let’s say that you have 100:1 allowable leverage, and you open a £5,000 position in the GBP/USD. £50 margin (1% of your £5,000 position) is set aside. As soon as you open your GBP/USD position, you are in a loss situation, because of the spread. So, now your “used margin” is £50 + the value of the spread, and your “available margin” is your account balance - your “used margin”.

Suppose price moves against you, producing a loss in your position. Now your “used margin” is £50 + the spread + the loss due to price movement. And your “available margin” (as always) is your account balance - your “used margin”.

I hope that clears things up for you.

3

Thankyou so much. :slight_smile:

Alpari, when you open account, you (the trader) chooses his/her own leverage setting, and you can change it whenever you want.
(i couldnt post the link as i have made less than 5 posts)

you say 100:1 leverage, then margin will be 1/100 or 1% of every trade
so 100 leverage = 1% of every trade
what does 3:1 leverage mean? How many % of each trade is margin?
33.3% of each trade?

Alpari say the margin requirement is calculated by “units of base currency / leverage”

“Margin is the inverse of the maximum leverage”? i dont get this.

3:1 I think is maximum leverage, I needed to specify when I open the account and that’s what I chose.
Demo account, I want to understand all this before I open a live account.

3:1 leverage on a 0.01 trade = 333 euros margin, this does not sound right…
I have done these trades and its more like 3 euros being tied up as margin.
Or do you mean 333 euro cents?

0.01 = 1000 / 3 leverage / 100 = 3 euros and 33 euro cents………correct?
so margin is 3.33 euros on a 0.01 trade… yes?

3:1 leverage = 33.3% margin requirement.
0.01 lot 1000 = 333 euros? Or 333 euro cents?

Neediing 330 euros to make 0.01 lot trade on 3:1 leverage, doesn’t sound right.
On my £500 demo account, a 0.01 lot trade ties up less than £2 initially, then it increases the more pips in loss the trade.

1 lot trade on 3:1 leverage would need 33,333 euro margin….? £28.9k….
But a pip is worth around 7 euros, and with 50 pip stop = 350 euro would be your total loss.
I would need 33,000 euros to make this trade? I couldn’t make this trade with 500 euros in my account?

after reading websites, they generally say choose 3:1 leverage.
with a £500 account, i could not make a 1 lot trade?
i would need to choose 300:1 leverage which would tie up 333 euros in margin. …?

Very sorry for all q’s…im getting there.
thanks.

4

Hello again, jonboy

You said that you have done [B]one-micro-lot EUR/USD trades in which the margin amount was €2[/B].

Believe me, if that’s true, then your [B]maximum allowable leverage[/B] is NOT 3:1. [B]It’s more like 500:1.[/B]

Do the math. If you can put on a €1,000 position, using ONLY €2 of your own money, how much leverage are you using?

No wonder you’re confused.

If there’s a question about the “leverage setting” in your demo account, you need to contact Alpari.

In my opinion, it’s silly to limit your [B]maximum allowable leverage[/B] (if, in fact, that’s what you’re doing in your Alpari demo).

If I had my choice, I would have 10,000:1 maximum allowable leverage in every account, demo or live. I don’t need my broker to tell me how to exercise prudent money management.

I almost never use more than 5:1 [B]actual leverage[/B] in any of my trades. But, that limit is determined by me, not by my broker.

If I were you, I would set up my Alpari demo account with the largest amount of allowable leverage available. Then, I would learn and practice good money management.

If you can prudently determine just two things —

[ul]
[li]the stop-loss your trade needs in order to “breathe”, and
[/li]

[li]the maximum loss you are willing to take on this trade, as a percentage of your account balance
[/li][/ul]

— then you can easily calculate the maximum position size allowed by these two criteria.

Then, the [B]actual leverage[/B] you will be using will take care of itself.

But, first things first. Contact Alpari, and find out what’s up with that 3:1 thing.

5

thanks!

just now, ive made a 0.01 euro/usd trade, it says margin £1.75 is being held. and margin level is fluctuating around 29222.95%…this % increases as i gain more pips and vice versa.
my account is set to 3:1 leverage.

on alpari website it says
"floating leverage: automatically applies higher leverage on a trade by trade basis depedning on volume: an open position of less than 3,000,000 usd nominal value caries maxium leverage of 1:500

maybe thats something to do with it…

so maybe it reaches closer to 3:1 as my trade volume increases.

this is tricky stuff to fully grasp but im getting there…

yeah i get you, you can choose the highest amount of leverage, but if you control your position size and excercise using stop losses, it doesnt matter.
You have the option of using more leverage by taking higher lot trades. Correct?

Choosing higher leverage, simply allows you to take bigger lot trades, doesnt it? as your total margin controls a bigger positon.

"I almost never use more than 5:1 actual leverage in any of my trades."
how exactly do you do this? determine your lot size, thats it?

yes i understand you, know your stop loss, know your total loss possible in monetary terms, making sure this total is a relatively small % of total account size, then the margin/leverage will take care of itself.

PS. the maximum leverage for my micro account is 1:500
So the 3:1 leverage i chose would be…the actual leverage?

Yes i think ive been using 500:1 leverage.
an old 0.02 trade tied up £3.40 margin.
2000 / 500 = 4 euros = £3.40 ish
so im wondering when does my 3:1 leverage come into force…when trading 3mill? but micro account max open positions are 200,000 units.

6

You’ve got me repeating myself, now. [B]Contact Alpari and find out what’s up with that 3:1 leverage thing.[/B]

I can’t help you understand the 3:1 leverage that you have “selected”. I don’t even know what that means.

I’ve never heard of leverage as low as 3:1 for a retail trader. For a hedge fund, sure. But, not for a retail trader.

Ask Alpari to explain this to you.

"I almost never use more than 5:1 actual leverage in any of my trades."
how exactly do you do this? determine your lot size, thats it?

Somehow, in all this discussion, the whole concept of leverage seems to have been missed. (How is that possible?)

Let’s try it this way:

If you have £1,000 in your account, and you open a 0.01 lot position, you are using ZERO actual leverage
…because your position is not larger than your account balance.

If you have £500 in your account, and you open a 0.01 lot position, you are using 2:1 actual leverage
…because your position is two times the balance in your account.

If you have £100 in your account, and you open a 0.01 lot position, you are using 10:1 actual leverage
…because your position is 10 times the balance in your account.

If you have £10 in your account, and you open a 0.01 lot position, you are using 100:1 actual leverage …because your position is 100 times the balance in your account.

So, when I say that I almost never use more than 5:1 actual leverage in my trading, I’m saying that my position size almost never exceeds 5 times the balance in my account.

If my account balance is $1,000, I won’t put on a position larger than 5 micro-lots ($5,000).

If my account balance is $10,000, I won’t put on a position larger than 5 mini-lots ($50,000).

If my account balance is $100,000, I won’t put on a position larger than 5 standard lots ($500,000).

This leverage thing is not nearly as complicated as you are trying to make it. You should be able to do this stuff in your head.

7

Clint thankyou so much, youre a good man.

spoke to alpari, they said my account is 500:1 leverage.
the 3:1 i chose, they say is not in force, on demo account,
when i open a live account, leverage is defaulted 500:1 but i can
choose a lower ratio if i want.

so no matter what lot size i trade, the initial margin will be calculated on 500:1

i understand you clint, its just not second nature to me yet.

youre 5:1 actual trading levels seems about same i was thinking of risking per trade. Sensible.

heres a hypothetical “maxing out” example so see if i understand:

to make a 1 lot trade. using 500:1 leverage. Eur/usd
would tie up 200 euros = £174 margin
with a 50pip stop, with each pip worth £6.29
total risk £314.5 loss
so i would need £174 + £314.5 = £488.50
i would need £488.50 in my account before i make the trade, to make this trade, and to let it breathe, without ever getting margin call.
and when i get stopped out, i have £174 left in my account.

and so actual leverage i would be using is 195:1
100,000 / (£448.50 converted to euros = 513 euros)

correct?

8

[B]Congratulations, jonboy![/B] — you’re starting to become a leverage expert!

[B]Correct[/B], based on 1 standard lot (100,000 units of base currency).
(I haven’t checked your EUR/GBP conversion rate, but I’m sure you have it right.)

…with a 50pip stop, with each pip worth £6.29
total risk £314.5 loss
so i would need £174 + £314.5 = £488.50
i would need £488.50 in my account before i make the trade, to make this trade, and to let it breathe, without ever getting margin call…

[B]Correct[/B]. (I’m taking your word for the £6.29 pip-value.)

…and when i get stopped out, i have £174 left in my account…

Close, but no cigar. If you get stopped out, you will have lost only the £314.50 in trade risk, determined by your stop-loss.
So, your account balance after stop-out will be £500 - £314.50 = [B]£185.50 [/B]

…and so actual leverage i would be using is 195:1
100,000 / (£448.50 converted to euros = 513 euros)

correct?

Not quite right. If your EUR/GBP conversion was correct (remember, I took your word for the conversion of €200 to £174), then your €100,000 position is worth £87,000. At the beginning of this trade, your account contained £500. So, the actual leverage you used on this trade was: 87,000 ÷ 500 = [B]174:1[/B].

Or, to do the math in terms of euro, as you did above, you should have divided €100,000 by the euro-equivalent of £500
(not by the euro-equivalent of £448.50, as you did).

Either way, you should get the same leverage figure. Drill this into your head: leverage used = position size ÷ account size.

Note: it is just a coincidence that your initial margin (£174) is the same number as your actual leverage used (174:1). Those two things are not related, and normally the numbers are not the same.

I realize that this was just a mental exercise to test your understanding of the concepts. And, I’m sure you would never abuse the leverage made available to you by your broker in this way. But, think a little on this: you have actually demonstrated the hazards involved in being over-leveraged. That one hypothetical trade, using 174:1 leverage, wiped out almost 63% of your account.

Keep up the good work. You almost have this thing nailed.

9

Thankyou thankyou thankyou Clint :slight_smile:

Your example in your first post: (GBP/USD)
100:1 leverage
0.1 lot
10,000 / 100 leverage = £100 margin
100 / 10,000 = 0.01 x 100 = 1% of position size is your margin

So is this correct? :
500:1 leverage
0.1 lot
10,000 / 500 = £20 margin
20 / 10,000 = 0.002 x 100 = 0.2% of position size is your margin
0.2%
So my margin for a 500:1 leverage trade is only .2%…which is way less than the margin required for a 100:1 leverage trade……………correct?

In a eur/usd trade, 1% margin of position size, would be 1% of notional value in euros, which you then convert to sterling, if my account is sterling……right?

and basically, for a 500:1 leveraged account, all you need to think is in terms of 0.2%…eg 0.01 lot trade is 1000 x 0.002 = 2 margin
they should advertise 500:1 along with .2%…its describing the same thing with diff numbers isnt it?
1000 / 500 = 2

This is important stuff, and I thank you again, I was watching wall street in cinema the other day and they were throwing terms like leverage and margin around, and it was perfect timing as I am working on this thread with your help. I bet some people in cinema were completely lost with the terms.

yes almost there, its making sense. Just need to brush up on my basic mathematics calculations and understanding too.

10

This is how it works:

LOW leverage will require from you MORE money to open a position, BUT also will require from you LESS money (Margin), to keep that position open in case goes against you.

HIGH leverage will require from you LESS money to open a position, BUT also will require from you MORE money (Margin), to keep that position open in case goes against you.

I keep my positions open for a long time, so I use LOW leverage.
If you keep you positions open for a short time, scalping for example, use HIGH leverage.

BE VERY CAREFUL!
Even professional traders get burned out by Margin sometimes.
I’ve been twice, is painful.

Alternatively,
If you win 100% of your trades use HIGH leverage.
If you are a Newbie use LOW leverage.

BE VERY CAREFUL!
If you get trapped by margin, there’s nothing you can do, besides:
Close you positions and take the loss, deposit more money or pray a lot
for your trade to reverse.

Do never, never… be fresh on trading.
You can loose as a blink of an eye.

THE BEST ADVICE IS: STICK WITH LOW LEVERAGE NO MATTER WHAT AND BE SAFE, BECAUSE LIQUIDITY (LOSS EVERYTHING), IS THE MOST DANGEROUS THING IN TRADING.

If you want to be a bit more risky, increase your trade volume but not the leverage.
Believe me: HIGH leverage is a trap, stay out of it.

11

Hello, [B]jonboy[/B]

Your math is perfect.

You seem surprised that 5 times as much leverage (500:1 vs 100:1) means only 1/5 as much initial margin (£20 vs £100).

Keep in mind that maximum allowable leverage is the mathematical inverse of required initial margin. So, if you double the leverage, you cut the margin by half. If you multiply the leverage by 5, you divide the margin by 5. And, so forth.

In a eur/usd trade, 1% margin of position size, would be 1% of notional value in euros, which you then convert to sterling, if my account is sterling……right?

[B]Probably[/B].

I believe that [B]most[/B] brokers calculate margin based on the true notional value of the actual base currency being traded (in your example above, that would be euro). I don’t know who your broker is. You should do the math on one of your own EUR/USD trades, and confirm the answer for yourself.

and basically, for a 500:1 leveraged account, all you need to think is in terms of 0.2%…eg 0.01 lot trade is 1000 x 0.002 = 2 margin
they should advertise 500:1 along with .2%…its describing the same thing with diff numbers isnt it?
1000 / 500 = 2

Exactly. You’ve just given an example of the inverse relationship I mentioned above.

As for advertising, I think leverage sounds more dramatic than margin.

Just think: with your tiny £2,000 account and 500:1 leverage, you can control up to ONE MILLION POUNDS worth of currency!

Of course, no broker would ever actually say that, because they have to make all sorts of cautionary legal statements about the misuse of high leverage.

But, as an advertising gimmick, [B]they don’t mind if you think of high leverage in terms of huge position size.[/B]