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Margin vs Leverage: What’s the difference?

The use of margin and leverage is a common way for traders to allocate a relatively small amount of funds to expose themselves to higher value trades and, potentially, higher profits. However, this can also expose you to a considerably higher level of risk, including losses that can exceed the initial investment. Because of the potential risk, it’s very important to understand what margin and leverage are, how they work and your obligations as a trader.

Margin

Margin is the amount of funds you need to have in your trading account in order to open a trade. To retain an open position you must also always retain sufficient margin in your account.

Leverage

Leverage is a ratio representing the level of exposure you have to a trade. Using leverage means you can control trades of higher value than the margin you hold.

Example 1: Calculating Margin

You have AU$10,000 in your trading account. With a margin of 1%, you’re able to open positions to a total value of $1,000,000 [$10,000 ÷ 0.01 = $1,000,000].

Let’s say you want to buy AU$500,000 (equivalent to 5 standard contracts) against the USD at an exchange rate of 0.800. Your Initial Margin requirement would be AU$5,000:

Initial Margin: 5 lots x [contract size x 0.01] = $5,000

If the Australian Dollar depreciates in value against the USD to 0.7950, your Variation Margin (unrealised loss) would be USD$2,500 (AU$3,145). You can then calculate your Total Margin requirement simply by adding the Initial Margin and Variation Margin:

Total Margin: AU$5,000 + AU$3,145 = AU$8,145

To convert this to a Margin Ratio, divide your Account Equity by the Margin Requirement:

Margin Ratio: [AU$10,000 – AU$3,145] ÷ AU$5,000 = 137%

Monitoring Margin with MT4

The MetaTrader 4 trading platform lets you monitor and control risk exposure in real time. Based on your individual margin requirements, the platform calculates the amount needed to retain any open positions and the trading resources available for entering into new positions, or for adding to existing open positions.

Example 2: Margin Call and Liquidation

If losses on an open trade reach a certain level, AxiTrader may move to close (liquidate) the position in order to prevent more significant losses. The liquidation level is set where the Margin Ratio falls below a certain point (usually 20%, but this can vary). 

Continuing our example above, let’s say the position remains open and the AUD falls further in value to a rate of 0.7920. 

Account Equity ÷ Margin Requirement = Equity [A$10,000 – A$5,051] ÷ A$5,000 = 99%

Because the Margin Ratio is less than 100%, the account is in Margin Call and the position can be closed. 

If the AUD continues to fall in value against the USD to a rate of 0.7858, the unrealised losses will increase to US$7,100 (AU$9,035). This means Account Equity will have fallen to AU$965, the Margin Ratio will have fallen to 19% (AU$965 ÷ AU$5,000) and liquidation will be triggered.

This position is liable to be closed by AxiTrader.

Choosing your leverage level

With leverage up to 400:1 available in some regions, AxiTrader clients are able to choose the level of leverage that’s appropriate for them. Leverage can be changed through the MT4 platform before placing a trade, or through your personal settings in the AxiTrader Client Portal.

Important information about Margin and Leverage

  • Open positions must maintain minimum margin requirements as detailed in our Client Agreement.
  • All positions have an Initial Margin requirement and you are required to keep an account balance over and above that requirement and any unrealised losses. 
  • Margin Calls can be made at short notice and can be substantial. Please familiarise yourself with our Client Agreement, especially the section relating to Margin Calls. 
  • Our Product Disclosure Statement describes Margin Requirements and a description of the risks of dealing in leveraged products.
  • Please be aware that it is the client’s responsibility, not AxiTrader’s, to monitor positions and make any margin payments as they become due.
  • Clients are warned that losses are not limited to their account balance and that they must not rely on AxiTrader closing out a position to prevent losses. 
  • Liquidation is not guaranteed to protect against a negative balance; markets can gap, systems can fail or other circumstances may prevent liquidation.

Margin & Leverage FAQs