Explanation of leverage and margin system in detail

Explanation of leverage and margin system in detail

In the previous topic of the Forex course on the Profits Expert blog, we talked about:
* Definition of financial markets and their types?
* What is the definition of Forex and its types?
* What is a brokerage company? What are the requirements for working in the Forex market?
* What are the features of the Forex market that make it the largest area of ​​investment and trading?
* What is the difference between Forex and the stock exchange?

You can read the first lesson via this link:   An introduction to Forex, in addition to the most important terms that you should know

As for this topic from the Profits Expert blog, we talk about the most important characteristic of the Forex market, which is

financial leverage.Since this course is for beginners, we will work to simplify all the terminology as much as possible. 

Financial leverage is considered the most important thing that distinguishes the Forex market and makes many investors want to invest in this field, so today we will talk about everything related to financial leverage, but despite what it distinguishes, there are many risks that may result from its use,
so all economic experts and workers advise In the field of Forex, be careful when using leverage. 

What is leverage?

It is a system that enables the trader in the field of Forex to trade with a value much greater than his own capital, and that leverage is in the ratio of 1: ***. This means that the value *** is the value that the trader can trade with for each unit in his account.

For example
, if the trader uses leverage. Finance 1:100 This means that $100 is the value you can trade with for every dollar in your account.
If a person’s account is $100 and he uses a leverage of 1:100, he can trade with $10,000 + $100 in his account.

Learn about the most important advantages and risks of working in the Forex field 

Does financial leverage exist in all areas of investment?

Leverage exists only in the field of Forex, but some companies and stock exchange brokers have begun offering financial leverage to users, but with much less liquidity than Forex.

So, what do I, as an investor, benefit from financial leverage?

As we say, financial leverage enables you to trade with a value many times the actual balance you have. Therefore, when the currency price moves in a small move, the return or profit from this simple movement will be very large.

So, what are the harms of financial leverage?

When you use financial leverage and in the case of buying a specific currency and the price of this currency is lower, even if it is a very small part, this will lead to a very large loss of the existing capital in your account. In

other words, financial leverage is a double-edged sword. It can make you gain multiple times your account balance, and it can make you lose your entire balance.

Why does a broker (company) offer? Forex leveraged traders?

In the beginning, you must know that there is a big difference between the Forex market (foreign currency trading) and other areas of investment, such as stocks and other areas

in the stock markets. A group of stocks may rise significantly, which may reach 100%. However, this increase in the price of the stocks does not affect It affects all people, but rather its effect on a specific group only, who are the investors in this company,

butthe price of currencies cannot change to witness an increase in this percentage or even less than it, because any increase or decrease in the price of the currency affects everyone who lives in that country,so the change in the price Currencies are in a good narrow range, and the control of this movement is the central banks, and therefore the profit is very limited if your capital is small.

For example

, if one euro = 1.3225 dollars
and you bought 100 euros for 132.25 dollars, and after a while the price of the euro rose to 1.3235 and you decided to sell the currency. 100 euros
, so 100 euros = 132.35,
gain = 132.35 – 132.25 =
0.10 cents.Ok, the same example, but using a leverage of 1:100.

When using a leverage of 1:100, your profits will also be multiplied by 1:100,
the gain = 0.10 * 100 =
10 dollars
, because Profits in the Forex market are very limited due to the very slight change in currency prices. The brokerage company offers the investor a greater opportunity to profit by trading with a larger amount of money in order to increase the percentage of your profits from trading, which is the main reason for using financial leverage.

Financial leverage is a method used by the broker or brokerage company. To attract you to invest in the Forex market,

we come to the most important question that all beginners in this field ask:

What does the brokerage company or Forex broker benefit from financial leverage?

For example

, we assume that you enter an exchange company one day and you will find two prices on the board like this: the buying price and the selling price.

Or if you are interested in currency rates, you will find in economic news or on any currency exchange site that will provide you with the buying price and the selling price,
and you will always find that there is a difference between the buying price and the selling price. Selling, and the purchase price is often more than the selling price

. For example, if you went to buy 100 dollars from the exchange company and the purchase price for the dollar was 18 Egyptian pounds, then you will pay 1,800 Egyptian pounds for the 100 dollars.
Okay, and you are still in your place. You decide to return the 100 dollars and take the Here you will find that there was a difference in your Egyptian money and you took less than 1800 pounds, and let us assume, for example, 1790 pounds.

Ok, why is this?
This is because the selling price is less than the buying price, and

this is the exchange company’s profit. The example above is the same thing that happens with the Forex brokerage company,

meaning that when you sell a certain amount, let’s say 100 euros, you will sell them for, for example, 132.32 dollars, and the one who buys 100 euros will pay 132.35 dollars, meaning there is a price difference of approximately 0.03. This cent is benefited by the brokerage company.
Well, imagine with me that you are trading for 10,000 euros.
The price of the euro is 1.3232 selling and the buying price
So, you will sell 10,000 euros for 13,232 dollars,
the person who is buying will buy for 13,235 dollars,
meaning the difference is 3 dollars, and the brokerage company’s percentage will almost increase. The bottom

line is

that the brokerage company offers you Financial leverage, because every increase in the volume of your trades will increase, in return, the percentage of the company’s profits from buying and selling operations.

This was a very simplified explanation of the concept of financial leverage, the advantages of using leverage, and the risks resulting from its use. What does the brokerage company or Forex broker benefit from providing financial leverage to investors?

What is the margin system? ?

In this topic, we will talk about all of:

– Definition of margin trading
– Definition of margin
– Definition of one unit of goods (
 LOT) and what is the contract size– What is the used margin and available margin in addition to some other important concepts

? What is margin trading?

It is a system that enables you to trade goods whose value exceeds the value of the balance in your account. The balance in your account is called
What is margin?

Margin is the amount that must be available in the user’s account as a percentage of the value of the transactions he enters.

What is a
A lot is the minimum amount with which you can trade a commodity. Companies that deal with the margin system deal with commodities that can be traded in the form of fixed units called lots.
Multiples of a lot can be traded, but you cannot trade for less than a lot.
What is the contract

The contract size is the actual value of the commodity that you are trading. When trading, for example, a ton of wood for 1,000 pounds, the
ton is a lot, and the contract size is equal

to 1,000 pounds. * When you buy 2 tons, you are buying 2 lots for 2,000 pounds.

The contract size varies from one company to another, and it is from The basic information that you should know about the company before dealing with it.

We learned about the definition of the margin trading system, the definition of margin, one unit of goods (LOT), and the contract size. Now we delve a little deeper.

Your account in the Forex company (margin) is divided when entering into transactions into two parts: –

1- Used Margin: The used margin

is the amount that is deducted from your account temporarily as a deposit that will be returned to your account after terminating the deal, whether with a gain or loss. It is a very small percentage of the value of the deal.

How is the used margin calculated?

Although the calculation of the used margin is done automatically in the company it is affiliated with, we will provide a method for calculating the used margin. The

used margin =

the value of the entire purchased commodity (contract size) / the doubling ratio (leverage).Example:

You bought 5 tons of wood, the price per ton is 1000 pounds.
The deal price = 5000 pounds.

The factory offers you a doubling ratio (leverage) of 1:10.
The margin used

=number of contracts (5) * contract value (1000) / doubling rate= 5000 / 10 = 500 pounds, so the amount you will pay as a deposit to the company is 500 pounds. This is the used margin.

2- Usable Margin:

The available margin is the amount that remains in your account after deducting the used margin, which is the maximum amount that can be lost in the transaction.

How is the available margin calculated?

Available margin

= balance (your account) – used margin.Example:

At a wood factory, you opened an account 

and deposited 2000 pounds into it. When you decided to buy 5 tons of wood, the company deducted the used margin by 500 pounds. In the previous example, theavailable margin
= 2000 – 500 = 1500 pounds, which is This is the maximum amount that can be lost in this deal.

* Ok, you sold the wood and the price of the ton when selling was 1,100 pounds, so the gain becomes

: Gain = selling price – original price.

5 * 1,000 = 5,000 pounds. Selling price =
5 * 1,100 = 5,500 pounds.Gain =
5,500 – 5000 = 500 pounds. 
deposit is 500 pounds, andthe gain is 500 pounds,so your account2,500
. Ok, God forbid, in the event of a loss,

we will assume that the price of a ton of wood has become 900 pounds.
The loss will remain 100 pounds for each ton
of loss = 5 * 100 = 500 pounds
. Deduct it from the available margin so that the available margin in your account becomes 1000 pounds.
If the price falls again and becomes 800 pounds,

the loss is deducted from the available margin again to become 1500 – 1000 = 500 pounds.

If the price of a ton falls again to 700 pounds,

the loss is 300 pounds in each.
loss= 300 * 5 = 1500 pounds

, which is all the remaining balance in your account, so the available margin becomes = zero.

What is the importance of available margin?

The loss in any deal is deducted from it

at the same rate as the wood factory. In the brokerage companies, I made a specific deal and the price of the currency that I bought continued to decrease until the loss became = the available margin.

comes to you what no one likes to reach,the margin call.
Here the company does By warning you, either you add money to your account, or sell it and bear that loss. Now, either you sell the deal and bear that loss, or the company will terminate the company on your behalf because the brokerage company cannot bear any loss, which is called
forced closure

, and the company returns the deposit that you paid during closing
Al-Jabri (Auto closed)
is the process of automatic selling of the deal when it does not respond to the margin call. It occurs when it becomes:
Purchase price – market price = available margin.


* The margin system is a very good opportunity for many people that enables them to trade in goods whose value exceeds their capital several times, while maintaining With the full profit from the deal, as if they owned its full price.


* To ensure that the person does not escape with the commodity, the commodity remains reserved at the institution in your name, awaiting your order to buy and sell

* Your loss cannot be greater than the available margin in your account because the company cannot bear any loss
* Trading The margin system is a double-edged sword. Either it maximizes your profits and makes you earn thousands of dollars, or you lose all the balance in your account, you must pay good attention and continuous learning, and do not rush and rush after quick profits without theoretical study and learning, then practical application with a demo account, and then start. This is done by opening a real account when you feel ready to enter the field.

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