One of the main reasons why so many people are attracted to forex trading compared to other financial instruments is that with forex you can get much higher leverage than with stocks and futures trading. Basically, leverage means borrowing a certain amount of money to invest in something. Forex leverage is a loan provided by the forex broker to the forex retail trader.

Historically, the amount of leverage provided by forex brokers has varied from 50:1 to 700:1. As an example, with a broker margin of 2%, you have to put only $200 as margin to trade $10,000 worth of currencies. In this respect, forex margin and forex leverage are two sides of the same coin so much so that in the trade above you would leverage your margin of $200 by 50 times. In this case the margin-based leverage is 50:1.

In the forex market we monitor currency movements in pips, which is the smallest change in currency prices. For example, when a currency pair like the USD/CHF moves 100 pips from 1.1200 to 1.1300, this represents only a $0.01 move in the USD/CHF exchange rate. This is why currency transactions have to be carried out in large amounts, allowing these small price changes to be translated into measurable profits or losses. However, unlike large financial institutions most retail traders do not have the financial resources to trade currencies in hundreds of thousands of dollars. This explains why leverage has been introduced in the forex market.

Although the ability to earn significant profits by using leverage is substantial, leverage very often works against investors. Let us see why and how this happens. Assume there are two traders namely Y and Z and each one has $5000 into their trading accounts. They also trade with the same forex broker who requires 1% margin deposit. After performing some technical analysis, both of them agree that the USD/CHF has formed a top and a reversal is imminent. Both of them decide to short the USD/CHF at 1.1200.

Trader Y chooses to apply 100 times real leverage on this trade by shorting $500,000 worth of USD/CHF (100 x $5,000) based on his $5,000 trading capital. Because USD/CHF stands at 1.1200, one pip of USD/CHF for one standard lot is worth approximately $8.92, so a one pip move for five standard lots is worth approximately $44.60.Unfortunately instead of falling the USD/CHF swings to 1.1300 and Trader Y loses 100 pips which is equivalent to a loss of $4,460.This loss represents a whopping 89.2% of his trading account!

On the other hand, Trader Z who is a  risk averse trader decides to apply only 5 times real leverage on this trade by shorting $25,000 worth of USD/CHF (5 x $5,000) based on his $5,000 trading capital. That $25,000 worth of USD/CHF equals to just one-quarter of 1 standard lot. As USD/CHF rises from 1.1200 to 1.1300, Trader B also loses 100 pips which is here equivalent to a loss of $223. This loss represents a relatively lower 4.46% of his trading account.

It would be now relevant to make the distinction between margin-based leverage and real leverage.In terms of margin-based leverage the broker allowed both traders to trade up to a maximum leverage of 100:1. Given that the broker requires 1% margin, Y has leveraged his margin of $1,000 to $100,000 for each standard lot. With reference to real leverage he has also used a leverage of 100:1 obtained by taking $500,000 divided by $5,000.

If Trader Y had bought only one standard lot (100,000 worth of currencies) he would have only used 20 times real leverage and lost less money. Therefore it is real leverage which is very dangerous.As in the example above, Trader Y has $5000 but trading positions worth $500,000! In contrast Z also has $5000 but is trading only $25,000. As the trade unfolds you see that Trader Y loses 89.2% of his trading capital while Z loses only 4.46%.

Thus if the forex broker is forced to reduce his margin-based leverage from say 100:1 to 50:1, this means that Trader Y will also be forced to reduce his real leverage since he will be able to buy only 2½ standard lots, that is, $250,000 worth of currencies instead of 5 full standard lots worth $500,000 of currencies. This is why on the 30^th August 2010, the CFTC has decided to limit  forex leverage for major currency pairs to 50:1. This decision by the CFTC has come into effect on 18^th of October 2010.

FOREX LEVERAGE LIVE ON MT4

By now you should have realized that there are many vital concepts that you should understand before going live. Any attempt to trade forex without properly understanding these concepts is like a big leap in the dark. If you are new to the forex market, trading with a good forex broker can be the difference between winning and losing. Therefore at the outset you should know which factors are important to look at when tracking down the best forex brokers. You can then ultimately select one of them to open a live account.

From the previous posts on this blog we have emphasized on many concepts which are forex margin, forex leverage, ecn forex and forex spread. In choosing your forex brokers you should make it a priority to consider each of these factors. For example you should ask yourself what is the forex margin percentage offered?  Do I really need significantly high leverage?  In August 2010 the CFTC which regulates retail forex in the US has decided to reduce leverage to 50:1 for major currency pairs. This means that as from October 2010 the margin available with US forex brokers will be 2%.

In that respect many forex brokers reviews sites now recommend not to open an account with a U.S. based forex broker regulated by the CFTC, due to excessive and over-bearing regulation imposed on retail forex brokers including reduced leverage levels which affects the way you trade. If you heed to their recommendation you will want to look for forex brokers operating in other jurisdictions such as the United Kingdom. It will also be appropriate for you to look at other regulations which apply to your account. For example, are client funds protected by fraud and bankruptcy?

The next question that you will need to ask is: what business model does the forex broker operate? Is the forex broker a market maker or ecn? This is crucial because a forex broker who operates a dealing desk is potentially dangerous. On the other hand, what if ECNs charge a commission when you open and close your positions?  Are you willing to accept that?

The next thing that you will need to consider is whether the forex spread offered by the forex brokers are competitive. Usually ECN brokers offer the best competitive spreads because they have access to multiple liquidity providers. But for any type of brokers you will need to find whether the spreads are fixed or variable? If they are variable, how wide do they get during the release of important economic reports such as the Non Farm Payroll Report. You should also look at slippage which occurs when your order is filled at a different price than what you are expecting. How much slippage can be expected in normal and fast moving markets?

The above are key factors which you should look at when considering forex brokers.  Furthermore you will need to ask the following questions: What are the trading platforms offered by the forex brokers? How many different currency pairs can you trade?  Do they offer micro, mini or standard accounts? This last question is particularly important because we always strongly recommend new traders to open a micro account before moving on to a mini or standard account. 

In this way you will experience live trading while risking the least amount of money. Also you will be able to test whether your forex broker is up to the standard. For example, you might be able to know what slippage to expect with forex broker X. For traders who want a forex robot to trade on their behalf they will need to ask an additional question: Does the forex broker offer an application programming interface?

One of the concepts which is not very often addressed but very important to understand is ECN Forex. ECN is an acronym for Electronic Communications Network. An ecn forex broker does not have a dealing desk but instead provides you with a marketplace where you connect to a worldwide exchange of banks and other financial institutions, and directly make the best deals. Before looking at how ecn forex works and the advantages you get when you trade with an ecn forex broker, let us first see how a forex broker who has a dealing desk operates.

Many brokers you will find online are called market makers. Market makers have a dealing desk which means that they take the other side of your trade. This means that there is conflict of interest because if you win they lose. This also implies that there is the risk they intentionally manipulate prics to steal your money. They “make the market” and thus know exactly where your stops are sitting. Indeed through stop loss hunting it is possible for them to swallow all the money you have in your trading account. Given that these market makers also make their profits through the spread  which is the difference between the bid and ask price, these spreads tend to be relatively less competitive because of less liquidity.

On the other hand an ECN broker allows you to enter a bid inside or outside the spread allowing for tighter spreads and more liquidity. Essentially you become the market maker when dealing with an ECN Forex Broker because they are routing your order to the best possible match elsewhere in the world, eliminating the third party which is the dealing desk.

Basically with ecn forex brokers you have direct access to many other retail and institutional traders, and the trades are done in the name of your ECN broker. A client trader might have their buy order filled by liquidity provider “Bank 1″, and close the same order against liquidity provider “Bank 2”. The best bid and offer is displayed to the trader. Consider the following example:

 Assume there are two banks:

Pricing

Note that from the liquidity provider perspective the bid is buy and the ask is sell:

                           Bid         Ask

Bank 1         1.3521      1.3523

Bank 2         1.3522      1.3524

                           Bid         Ask

Client price:  1.3522     1.3523      (1 pip spread)

The best bid and ask prices for the tightest spread is displayed to the client trader.

Execution     

                      Order       Price    Liquidity Provider    

Client 1           Buy        1.3523        Bank1

Client 2           Sell        1.3522        Bank2

Each trade gets executed at the liquidity provider which posted the best price.

As you can see from the above, prices stream from various liquidity providers to an aggregation engine which then selects the best bid and ask prices from the streamed prices. The best selected prices are posted to clients. The fact that you also have various liquidity providers in an anonymous trading environment removes the possibility of any conflict of interest which characterizes forex brokers with dealing desk. Indeed the great thing about ecn forex brokers is that you are allowed to make the market. I hope that you can now see why the best forex traders claim that the future of forex trading is ecn forex.

When displaying their live currency prices market makers always quote a bid and an ask price. The bid is the price at which the market maker is willing to buy a currency which is equivalent to the price at which the trader is willing to sell the same currency. The ask price is the price at which the market maker is willing to sell a currency which is equivalent to the price at which the trader is willing to buy the same currency.

The best way to understand forex spread is to take an example:

Look at the following currency quote:

Currency pair        Bid        Ask

GBP/USD           1.4900   1.4904

Here you can see that the ask price is higher than the bid price. This means that if you want to buy GBP/USD the market maker will ask or sell currencies to you at a price of 1.4904. However, if you want to sell GBP/USD to the market maker will bid or buy from you at a price of 1.4900 for your currencies. Therefore we can see that the market maker buys at 1.4900 but sells at 1.4904. The difference which is called the forex spread is where the forex brokers make their profits from. In the above example of the GBP/USD quote the forex spread is 4 pips.

One of the main reasons why an online forex trading business can be profitable is because of forex margin. Forex Margin allows you to earn money from foreign exchange trading whether you trade by yourself or use an automated forex trading robot to trade on your behalf. In fact, forex margin is the amount of money required by a forex broker from a trader to open a trade or position in the foreign exchange market. This concept of margin has stemmed from stock trading, and is today helping small retail traders around the world to participate in forex.

Trading on margin is nothing but taking a short term loan from your forex broker. Before you can start trading on margin you’ll have to set up a forex trading account with a forex broker, and deposit money in this account. Generally, for margin trading of 1% the broker will ask you to deposit only $1,000 in your account.

Basically, you are providing just 1% of your trading capital, the remaining 99% is provided by your forex broker.Indeed there are even forex brokers who require only 0.5% of margin which means that with $500 you can buy up to $100,000 worth of currencies, or technically speaking you can leverage your account by 200 times !

You also have the opportunity to trade on margin in the stock and futures market,but you get much more leverage in the foreign exchange market because of the special nature of currencies. What is also great is that no interest is paid on the borrowed capital, but only an amount paid for the roll over positions-if open positions are not closed before the delivery date they are carried forward, and the broker will then charge an interest.

You must calculate the margin required as a percentage of the lot value.If your account is denominated in USD the margin required per transaction is calculated in USD. For example, retail forex brokers always quote currency pair such as EUR/USD (i.e. EUR in terms of USD). If the EUR/USD is trading at 1.2500, that is one Euro is worth 1.2500 US Dollars, and you want to buy 10,000 Euros or 10K, you would sell 12,500 USD to get those 10,000 Euros. Basically your margin required will be 1% of $12,500 which equals $125.00.

Let us take a look at the following example:

You have 2 trading accounts with two different forex brokers, Broker A has 2% margin requirement and Broker B has 1%. We consider the above example of the EUR/USD trading at 1.2500.  You have a capital of $10,000 in your trading account, and trade fixed 10K lots. We also assume that you want to put $500 as margin with each broker.

With Broker A the margin required is 2 % and so you will need to put (2% x $12,500)  $250 for every 10K lot of EUR/USD you buy. Thus you will buy 2 lots of EUR/USD at 1.2500 because you are willing to put $500 ($250 x 2) as margin on that trade.

With Broker B the margin required is 1 % and so you will need to put only (1% x $12,500) $125 for every 10K lot of EUR/USD you buy. Thus you will buy 4 lots of EUR/USD at 1.2500 because you are also willing to put $500 as margin on that trade.

Now let’s say that the trade is a bad one, and the EUR/USD moves 50 pips in the wrong direction. Given that with a 10K lot in a mini account one pip is worth $1, with broker A you lose $100 ($1 x 50 pips x 2 lots) , but with broker B you lose $200 ($1 x 50 pips x 4 lots).

So with broker A you have to put more money as margin, and so you buy only 2 lots. However, with broker B you have to put a relatively smaller amount as margin ($125 instead of $250), and in this case you buy 4 lots.The main point that you should understand here is that though Broker A requires you to put more money as margin you are in fact facing less risk than with Broker B.

The fact that you have used more leverage with broker B means that your account balance falls by a higher amount ($200 instead of $100).With Broker A you have leveraged your margin by 50 times that is you have put $250 as margin to buy $12,500 or 10,000 Euros. However, with broker B you have leveraged your margin by 100 times because you have put only $125 as margin to buy $12,500 or 10,000 Euros. Alternatively, you can look at it in terms of real leverage to see that with  your initial capital of $10,000 you have bought $50,000 worth of currencies with broker B, whereas with broker A you have bought only $25,000 worth of currencies. This means that your real leverage is 5 times your trading capital with broker B but only 2.5 times with broker A. Read more about forex leverage.

And leverage is a double-edged sword! Imagine the profits you would have made if the Euro had instead moved 50 pips in your favor. You would have reaped $100 with broker A but $200 with broker B. So leverage can work for you as well as against you. In fact, a large majority of retail traders lose in the forex market because they don’t understand forex margin and leverage. So if you want to tilt the odds in your favor, and become a successful forex trader, make sure you thoroughly understand how these concepts work.

FOREX MARGIN LIVE ON MT4

RECOMMENDED READINGS

• Forex Options Trading – Leverage and Margin in Forex Trading … – There are other forex margin terms that a trader will likely come across with when doing currency trading, such as, “margin required”, “account margin”, “used margin”, “usable margin” and “margin call”. All these terms have certain …
• Margin Trading from A to Z: A Complete Guide to Borrowing … – What is Forex Margin Trading? Forex Trading margin simply refers to a method of applying leverage the purchasing power of money increased. Leverage simply means control over a large sum of money with a very small amount. …
• Currency Trading Margin – Forex Margin Trading As a Method of Leverage – Currency Trading Margin – Forex Margin Trading As a Method of Leverage Currency Trading Margin A forex margin account is used by a forex trader when he wishes to invest into a position which requires a much higher financial investment …
• Expanding Profits by Means of Margin Trading in the FX Market … – bollinger bands forex – Forex margin trading applies leverage to increase the purchasing power of your money. By way of leverage, a comparatively small amount is bestowed to exploit a greater amount. To make this likely, …
• Forex Margin Trading – Forex Margin Trading. Margin trading Forex is a good way of leveraging your money, it allows you to increase your purchasing power. Leverage simply means that you can use a small amount of money to control a much larger amount of money. …
• Risks and Rewards of Forex Margin – Having a forex margin account is the standard way of trading the forex market. Without it, most traders would not be able to make a decent income from currency trading. It has equally both risks and rewards associated with it. …
• Currency Trading Margin – Forex Margin Trading As a Method of Leverage – A forex margin account is used by a forex trader when he wishes to invest into a position which requires a much higher financial investment than that which is currently available in the account of the trader. …

Forex Margin Trading occurs when a trader puts only a small amount of money to control a larger amount of currency. In the video we show a live example of Forex Margin Trading. In the trade we  have bought 2 lots of EUR/USD which is the amount you will find in the size column. The 0.20 amount represents 2 mini lots or 20,000 Euros. Given that our trading account is in US dollars, to buy those 20,000 Euros we had to sell 24,204 US Dollars.

This is because at the time we bought the Euros the market price was 1.2102. This means that at the time of purchase one Euro was worth 1.2102 US Dollars, and therefore to buy 20,000 Euros we had to sell (20,000 X 1.2102) 24204 US Dollars. But here is the cool part ! Forex Margin Trading allowed us to buy 20,000 Euros with only 1% of the 24204 US Dollars!

CLICK HERE TO WATCH THE VIDEO ON YOU TUBE !

Technorati Tags: Forex Margin Trading

And to answer your question whether your "simulator" will work with "one of these brokers" really depends on which code the simulator was created in. Is it an Expert Advisor coded for Metatrader? If so, MB Trading does not yet support the Metatrader software ( though are Rep there tells us they are working on it). MB uses the MBT Navigator which is much more difficult to create auto trading software for. FXCM recently began using Metatrader in conjunction with their FX Trading Station 2.0. Their Metatrader platform has huge drawbacks including not allowing demo accounts, not supporting multi-user accounts, and reportedly experiencing problems communicating between their FX Trading Station trade servers and their Metatrader Trade servers. I would recommend you google "Metatrader broker reviews" and find the brokers that best works for your situation.

I tried using 1:100 leverage on bigger stop-losses such as the size and value of my entire trading capital. I’ve won 2 times this way, but I still think its very dangerous as there is a high probability of being wiped out eventually at some point. I think that using 1:100 leverage is like gambling. I’d been using 1:25 leverage and set stop-losses of the value of all of my trading capital and was winning every time I did this without failure and was generating 10%+ profit every day.

What I’d like to know is in your opinion would I still be okay if I did what I was doing with 1:25 leverage and a much higher stop-loss, but used 1:50 leverage instead of 1:25? What would you suggest here?

To start with I wouldn’t use any leverage at all. You shouldn’t really risk any more than 2% of your capital on any one trade and no more than 6% in total at a time. Start playing with high leverage and then you could lose all of your capital very quickly.

You are also unlikely to get any margin as a novice trader with no trading history or capital to back up the risk involved in using high leverage.

You will find trading with real money is very different to using a practice account – you have no idea of the emotional rollercoaster that will put you through.

I would recommend reading The Online Trading Athlete before you do anything.

95% of investors lose money trading FX for a reason – a 10% daily return may sound great in principle, but in practice you are extremely unlikely to get that consistently, 10% per week is more realistic.

Thanks for the help!
Thanks for the answer La. What I was saying though is that basically if you want to engage in a longer-term trade then trading with leverage is not a good idea, if I am not mistaken?

Trading highly leveraged is too risky to get "margin called" which is the term you are referring to when the broker closes out your position. It is risky if they let you run the trade any longer and you start to lose the broker’s money. Your 1k is essentially collateral for them allowing you to use leverage. I believe you can add more money to your account.

Depends how much you use for short-term. If you use it all on one trade, fluctuations against your position can wipe out a lot of money in your account even if you exit early.