Leverage Rules

1. Leverage is the ratio that expresses the margin requirements imposed by the broker. It can be explained by an example, if a broker requires minimum margin as 2% in an account, a trader must maintain at least 2% of the total value of a current trade available as cash in the account, before you proceed.

2. Leverage ratio can be expressed as, 2% margin is equivalent to a 50:1 leverage ratio (1 divided by 50 = 0.02 or 2%). The relationship between leverage and minimum margin requirements can be understood as -

3. EAs a trader, it is important to understand both the benefits and the pitfalls, of trading with leverage.

4. Using a ratio of 50:1 as an example means that it is possible to enter into a trade for up to 50 dollars for every dollar in the account.

5. Margin-based trading can be a powerful tool – with as little as $1,000 of margin available in your account, you can trade up to $50,000 at 50:1 leverage.

6. It means that investing $1,000 to the trade; you have the potential to earn profits on the equivalent of a $50,000 trade. Of course, in addition to the earning potential of $50,000, you also face the risk of losing funds based on a $50,000 trade, and these losses can add up very quickly. Traders suffering a loss without sufficient margin remaining in their account run the risk of triggering a margin closeout.