Many traders have a vague idea of such basic concepts as leverage and margin. Of course, to open or close a deal, it is not necessary to know the meaning of these two terms. However, over time, when a trader begins to delve into the subtleties of trading on Forex, he will need to understand them.
About the margin and leverage
Each trader when choosing an account chose or accepted the proposed value of the leverage. Usually, it looks in the form of a ratio: 1:10, 1:100, 1:500, and so on.
These figures show the sum a trader will be able to use for transactions due to a leverage. For example, 1:1 will allow the trader to use only his deposit amount. But with a leverage of 1:1,000, a trader will be able to enter into transactions exceeding his deposit by 1,000 times. This is the financial support that a broker provides to his clients so that they can trade with their deposit size on Forex.
But at the same time, even if the trader loses all his means, the broker’s funds will remain intact. The more the leverage, the more trades a trader can open with the same amount of deposit, and it will depend on the margin.
The margin is closely related to the leverage. It is a pledge that is blocked on the trader’s account when he opens a deal. If you have two accounts with the same deposit, but they will have different leverages, and you conclude two completely identical transactions on both accounts, the margin will be different.
The larger the leverage, the less will be the collateral that the broker will freeze on the trader’s account. Accordingly, with a larger leverage, the trader will be able to open more deals, gain more profit or loss.
Reading the AvaTrrade review will tell you more about the margin and the leverage.