Do you know what Forex Leverage is?
There are so many Forex trading models, but the most outstanding trading model is known as Leverage trading. At eToro, Leverage trading model gives you an opportunity of accessing the forex marking by making only a relatively small initial deposit. This means that if the market favors you, you can make a higher net return than your initial deposit, something that could not have happened if you had traded the currency physically.
However, it good to not that Leverage works in both ways, meaning that just the way you can make higher returns that your initial outlay where the market favors you, you can also make huge losses if the market does not move in your favor hence the risk of leverage trading.
So how do leverage trading work
Leverage can be basically viewed as a way of controlling a huge market exposure for your selected small outlay raging from 0.25% to 5 %, using our eToro leverage to suit model.
At eToro Index, margin or leverage is calculated as a ratio, for instance, 50:1 which is also the same as a 2% margin worked out as 1/50*100= 2%. According to this illustration as a trader, you will require to have at least 2% of the total market exposure in your account of your intended forex position to trade. The required leverage position refers to the funds balance that your account should have for you to open and maintain a forex position.
However, a small fee will be charged to your account each night as a fee for the market exposure which also includes the amount that had been borrowed to allow you to trade in full position. In actual sense, leverage can be viewed similarly to as buying a house with borrowed money or mortgage.
The eToro Index trading account is automated thus calculates leverage in real time using prices of the pair currencies you are trading. This means that change in prices of the pair currency you are trading affects the margins. This gives you full control and awareness of the margin you need when trading.
For you to trade with pairs that are not your base currency, the leverage has to be converted into your base trading currency using the current markets currency rate or price for your trading pair.
Leverage to Suit at eToro Index
At eToro Index, you are provided with Leverage to Suit model of the entire forex trades. This means that as our client you have the privilege of choosing the leverage scale you want to trade with which best fits your trading strategy and risk for any particular trade. Our Leverage to Suit you as a trader to choose from different scales that range from 5% (20:1) to 0.25% (400:1).
The eToro Leverage to Suit has been designed in a way that allows traders enjoy the privilege of risk flexibility and greatest trade.
Trading Leverage Equivalent Margin Required Risk Persona
Here is a table showing the various levels of trading risks from low risk to high risk
-20: 1 5% Low Risk
-25: 1 4%
-50: 1 2%
-100: 1 1%
-200: 1 0.5%
-250: 1 0.4%
-300: 1 0.33%
-400: 1 0.25% High Risk
Margin table illustration
Take for instance that GBP is trading against USD at 1.6292/1.6294 respectively.
If you intend to enter the market and place a trade to sell 100,000 GPB against USD at a price of 1.6292. You decide to pick 50:1 as your trading leverage. The fund balance that your account should have or the initial outlay to place a trade can be calculated as 100,000/50 = GBP 2,000. However, to reflect the risk properly, the margin need to be converted into USD.
To convert the margin to USD you take mid rate of the pair currency your trading and multiply it with GBP amount as follows 1.6292/1.6294= 1.6293
GBP 2,000 * 1.6293= USD 3,258.60
Therefore, you will need USD 3,258.60 or GBP 2,000 margin to place this trade
It is good to note that the margin is calculated basing on the real-time prices of the currency during the life of the trade which is a standard procedure that should be followed in retail forex markets. Therefore, if the prices of the pair currency being traded fluctuate the margin also fluctuates. For instance, if the mid-price of GBP/USD increases to 1.6400 theoretically, the margin required to maintain the trade also changes to 1.6400*2,000 or USD 3,280. On the other hand, if the mid-price decreased to 1.58 the margin required to maintain the same trade decreases to USD 3,160.
Margin Close Out
At eToro we value your money thus manage risk very serious and have developed mechanisms to protect you from incurring huge losses should the market move against your favor. This is why we developed the market close out.
Market close out is a policy that we developed to help traders to limit the losses of their accounts before they become too huge. Margin close out is designed in a way that should set Margin Level Indicator drops below your set Market Close Out Level, which varies between accounts, the eToro system closes the losing trades at the best available prices before the losses accelerate. The system closes all your trading positions until your margin level indicator returns to positive equity. However, you should note that the prices can gap during high market vitality affecting the prices at which your positions are closed out.
When you log in your eToro account, you can see the Margin Level Indicator on our trading platform. The level of cover by your trading positions is usually represented by your accounts Margin Level Indicator. Margin Level Indicator can display one of the following 3 scenarios.
1st scenario: When your Margin Level Indicator is higher than 200% then it will be shown as >200%. This indicates that your account has more than double the funds required to keep trading positions open.
2nd scenario: When your Margin Level Indicator drops below 200%, it will be shown as between 100% and 200% basing on the current ratio.
3rd scenario: When Margin Level Indicator is equal to lower that the Margin Close Out level, it shows that you do not have sufficient funds to cover your Total Margin. If this happens Margin close out level is triggered depending on the level you set. If the Margin level drops below the Close Out level, a warning symbol appears next to the Margin level to alert you.