Leverage and Margin in Trend Trading

Leverage and Margin in Trend Trading

One of the secrets of wealth is the use of leverage. In short, the principle of leverage, as applied to making money, is to use a small amount of money to control a large asset.
Here, you can explore leverage and how it relates to and differs from the margin provided by your brokerage firm.

Leverage: A double-edged sword in the battle for wealth
A common example is the use of leverage when buying real estate. You can control an expensive piece of real estate with a small down payment.
Since you only invest a small amount of your own money, you can use the remaining balance of your money to invest in other financial instruments, thus expanding your investment interests far beyond what you would do if you had to pay the full amount of each investment.
It is similar in the trading world. For example, you can trade futures and forex because they often give you 20 to 1 or even 50 to 1 leverage. Controlling a large amount of money by investing only a small amount of money allows you to make more money faster.
For example, if you place an order for 1 lot on a forex pair worth $100,000, you may be able to open this order with only $2,000 investment; However, you can make money based on the $100,000 value of the currency pair.
On the other hand, you can also lose an amount of money based on the $100,000 value of the currency pair! This is exactly what the phrase “leverage is a double-edged sword”.

Margin: Requirements for the privilege of using leverage
In line with the comparison to buying a home using a mortgage, to open a leveraged position in the market, you have to make a down payment. Real estate brokers work a little differently than buying a home in that you’re not actually discounting a small percentage of the property’s value for one day’s ownership.
When trading, you put a percentage of the value of the financial instrument to control the full value you are buying. This is called the margin, which acts as a “good faith deposit.” Required margin is the amount of money a trader is required to have in his account to control the size of a particular order. They are based on a percentage of the value of the entire order.
For stocks, the margin required is usually 50 percent (or 25 percent for qualified day traders). With futures contracts, the margin required is often around 5 percent. With spot forex, the required margin is at most 2% in the US (and it can be less in other countries).

If you are losing money and the value of your open positions (the money you are still investing in the market) is less than your margin requirement, you may receive a margin call. When this happens, your broker will usually close the position you opened in the market unless you add more funds to your account.
Leveraged investments can be riskier than non-leveraged ones because the balance of money you control, minus the “down payment” (margin), is borrowed money. If the market falters catastrophically, other than the down payment, you owe the full amount (plus potential interest on the borrowed money).
Be sure to speak to your broker and ask about your maximum risk exposure based on your account. Some brokers offer a technique that attempts to limit your maximum loss of funds in your brokerage account.