Very new to forex trading. Never used margin in my demo account. I do not see a field in the new trade dialog where I select the margin option. For example, say I select 0.50 lots which is 2% risk. But I want to apply my 50:1 margin. How do I do that? I don’t imagine I select 50 times 0.50 = 25 lots or do I?
What do you mean by margin
In Forex you always use margin every time you have a position open, even if the value of the position is less than the accounts equity.
I should have said leverage, not margin. My demo account allows 50:1 leverage but if I want to use leverage how do I do that? If some day I go live with a $2000 account balance can I trade as if it were 50:1 or $100,000? Clearly no. But then how does one use leverage?
your leverage is already in use
you are now trading with the amount deposited time 50
I’m sorry to be so dense. It seems I could risk $2,000 in hopes of winning $100,000. (50:1) If I had a long term win rate significantly better than 2 times out of 100 then I could deposit $2000 a few times waiting to hit the $100,000 jackpot. But since 2 times out of 100 would be easy to accomplished by experienced traders, why aren’t they all millionaires? Clearly I don’t understand leverage. It seems that if I risked $2,000 by trading X number of lots, then I could actually trade 50X lots trying to make $100,000. I may lose $2000 several times but a well established win rate of 55% (not uncommon I understand) will almost certainly get me $100,000 before long. Feel free to laugh but I just don’t get it.
It doesn’t make sense as to what you’re saying.
How are you getting from 2000 to 100000?! Theres no 100000 dollar jackpot bro.
Just because you have leverage doesn’t mean you have to use it or that it will benefit you. If you start with 2000$ and leverage is 50 to 1then you have 100,000$ worth to trade. Which means you can trade with higher lot sizes. If you use very small lot sizes then you’ll effectively be using no leverage. As your lot size goes bigger then the leverage from the broker kicks in.
You simply enter a position (long or short) which has a notional value larger than your account balance.
Let’s say your account currency is USD, and you want to trade USD/CAD. If you enter a one-mini-lot position (which has a notional value of $10,000), your position will obviously be 5 times as large as your account balance. In this example, you are using actual leverage of 5:1. This is well below the maximum allowable leverage (50:1) of your account, so your trading platform will accept your order to enter, without question.
You could enter an even larger position, using more leverage, up to the maximum allowable leverage (50:1) dictated for your account.
Yes, you could that – but, don’t.
Using ridiculous amounts of leverage is one of the stupid things that destroys accounts.
However, if you did it, it would play out like this —
For simplicity, let’s use a trade in which the base currency is the same as your account currency (like the USD/CAD trade in the previous example).
Let’s say you have exactly $2,000 in your account, and you have no open positions at this time. You want to open a maximum-size USD/CAD position. You attempt to place an order to enter one standard lot (100,000 units of USD/CAD) which is worth $100,000 (50 times the size of your account).
Your platform automatically scans your account and accepts your order, because it does not exceed the 50:1 leverage limit.
Immediately, two things happen.
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Your platform replaces the required initial margin (2% of the notional value of your position) with a lower maintenance margin (typically half of the required initial margin). And this maintenance margin amount is set aside (within your account) to protect you and your broker from a total wipe-out of your account.
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Your account shows an initial “loss” equal to the value of the spread on a one-std-lot position.
In numbers, it looks like this:
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You have successfully entered a $100,000 position (using a $2,000 account).
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The maintenance margin (1% of the notional amount of your position) is $1,000. This amount is set aside for the duration of your trade. You can’t use this $1,000 margin amount for any purpose (such as covering losses), while your trade is open. After your trade is closed, that $1,000 margin amount will be released back into your ordinary funds.
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The dollar-value of the spread will show up as a loss. Let’s say the spread on USD/CAD is 3 pips, and the value of one pip (based on your position size and the current price of USD/CAD) is $7.70 per pip, then you will immediately have a loss of $23.10 due to the BID-ASK spread.
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So, the amount remaining to cover any loss which this position might experience will be $976.90. That is, $2,000 initial balance - $1,000 maintenance margin - $23.10 spread cost = $976.90.
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If the pip-value remains at $7.70 per pip per standard lot for the duration of your trade, then any loss which develops in your trade must not exceed 126 pips, otherwise your position will be closed in a forced liquidation ($976.90 ÷ $7.70 / pip = 126.87 pips).
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If a loss greater than 126 pips occurs in this trade, your position will be closed, and your account balance will be $1,000 (the value of the maintenance margin, returned to you).
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Thank you very much for your patience and the time you spent to provide a detailed explanation. I now understand.
My key misunderstanding was that even on small trades it may be necessary to use leverage.
Thanks to all who responded.