Leverage and margin - wrong interpretation?

Discussion in 'Forex' started by neuroticself, May 17, 2005.

  1. Hallo experts,

    Put yourself into patient mode, I'm fresh from trading kindergarten.

    Just when I thought I figured out leverage and margin I was struck with this fact: the lower the leverage, the higher the margin. Now this will be crystal clear for the rest of you, let's see if I have it right: if I trade 100k at 100:1 I just commit 1k at trading time, right? And if I'm trading a major pair my margin would be, let's say, 1% of the position (starting at 1000 at trade time and moving with the rate subsequently). Conversely if I'm trading at 50:1 with the same 1000 my position would be 50k and the margin would be 2%, so again 1000.

    Problem is: I am thinking of the margin as a guarantee for the broker that even in a sudden move of the rates there's some headway to close my position(s) without incurring a loss (for the broker itself, on lent money). But then wouldn't it be more logic to ask for a higher margin when the leverage is stronger? The same market move would do more harm to the broker borrowed money if leverage is higher, wouldn't it?

    Sorry, probably a dumb question given that this inverse leverage/margin relationship seem to be standard practice, yet I can't figure out... (wrong math?)

  2. 1. don't worry about hurting your broker - they take care of themselves.

    2. with forex, your account will be closed - dealt a margin call - WAY before you can get in deeper than the actual money you have in your account.

    3. as I understand it, "leverage" and "margin" are one in the same. it is like saying a shark is a fish.

    4. you're correct about your putting up $1000 at 50:1 and being able to trade X-number of units of currency; same with 100:1.

    whether or not your broker allows you to commit the full number of units to trade, is something, as far as I know, that you may want to ask your broker about directly.

    which broker(s) are you referring to in particular?
  3. Thanks,

    1. not worried about them, but I want to be sure I have things straight before diving in, and I still can't get the business logic here from the broker pov

    2. uh? what if a gap opens?

    3. same as my understanding, it's the logic behind that I can't figure out

    4. that's reassuring

    I don't think my prospective broker would allow me to "commit the full number of units to trade", if I understand what you mean (no margin so that I commit my all acct balance?). I called them before posting this and a kind operator explained me again what I already knew (the inverse relationship) but not the logic behind.

    The broker I'm thinking of is the only one (afaik) that allows trading fractional minis at will (and so allowing for drawdown control with surgical precision). Given that it's your very same broker and that you've been accused of marketing them here before (which I don't think is the case) there's no need to state the name here, the astute readers will be able to guess it for themselves if so they desire.

    Thanks so far, haven't regained my sleep yet if one can say so...
  4. If it's OANDA then yes, just go to their site - they have thorough definitions about margin. The also have FXMath - that is very good to figure out trades, units, margin, etc.

    In addition, their customer service is excellent. They will answer all your questions.

    They also have their own message board you can post questions on and more importantly read what others have already said.

    Now all the Coinz-bashers will whine that I am "shilling" OANDA - I could care less what the losers say, because everything I stated is already known as common facts about that broker.

    If Baron doesn't like it then he can plainly say so here. But, to my knowledge, mention of brokers is perfectly allowable on Elite Trader.

    Best regards,

  5. I've seen the site and I've called them, as I said, no satisfactory reply. I don't want to start a flaming war about fx dealers, I want to understand the logic behind leverage/margin, no matter who the dealer/broker is.

    Maybe there's some former fx shop employee on the forum that will clear that for me.

  6. What, exactly, do you mean by "logic?"

    You mean, why do brokers offer margin?
  7. Not exactly.

    It is my understanding that brokers/dealers offer leverage/margin to make higher potential profits for their customers viable (at 1:1 leverage you wouldn't go too far, or not as fast at least). This way we have an incentive to trade more, allowing them to profit more frequently from the spread.

    If we all agree that higher leverage = higher potential risk then I don't understand why (from the broker pov) I would let the usable residual margin for a given set of open positions to *increase* for higher levels of leverage. I would want my more risk-addicted customers to be adequately "padded" in case of a sudden move of the market, if only to keep them alive a bit longer and profit more.
  8. Steve_IB

    Steve_IB Interactive Brokers

    Yeah you're about right. It's just the inverse so margin is 2%, leverage is 100/2 = 50:1. Margin is 5%, Leverage is 100/4 = 25:1.

    Yes, for most brokers it makes sense to ask for a higher leverage to cover their risks. A gap up, with every client betting on the same direction, and unhedged risk.... well, then's when the shops close down, and why the FX world has a bad reputation. Go with a reputable broker.

    This is the unregulated wild west f FX. there's FX shops in this region who actually don't charge you any margin. That's right. You trade on pure credit. You win, they pay you. Everyone wins, they disappear. You lose you pay - with your money or your legs!!