Leverage and margin
In Forex and CFD markets, traders can trade with leverage. This means that they can invest more than the equity on their trading accounts as long as they can offer a guarantee called "margin".
This guarantee is necessary because:
- there might be sudden price moves in the market, and
- price gaps can happen during certain events, whether the market remains opened or closed.
Losses in open trades should never be higher than the available equity of a trading account. However, a sudden move would result in a negative balance on the trading account which would result in the trader having a debt with the broker.
The guarantee, or "margin", the broker asks for, depends on:
- the historical liquidity and volatility of an asset, and
- estimated future liquidity of the asset.
While historical liquidity determines the guarantee the broker asks for by default, estimated future liquidity determines temporary margin requirement increases a broker might introduce before events which are thought to reduce liquidity, for example the referendum about the Brexit.
Margin requirements at Darwinex
Margin requirements for assets offered by Darwinex can be consulted in the list of assets and spreads.
The % indicated as margin requirement is the % of the nominal value of your trade that you'll have to come up with as margin.
- Trading the AUDUSD requires a margin of 0.50% which is the same as a maximum leverage of 1:200.
- The nominal value of trading 0.01 contracts of AUDUSD is 1000 AUD.
- 0.50% of 1000 AUD is 5 AUD.
- If your trading account has EUR as base currency, 5 AUD will be converted to EUR.
Not all assets require the same margin. While the lowest margin is 0.50%, which is the same as a maximum leverage of 1:200, there are assets with a margin as high as 5%, which equals to a maximum leverage of 1:20.
Information to watch out for in the MT4 terminal
- Balance: Funds deposited plus profits and losses already realized
- Equity: Balance plus the floating profit/loss of open trades
- Margin: The guarantee you are being asked for having open trades
- Free Margin: the difference between the Equity and the Margin of a trading account
- Margin Level: (Equity ÷ Margin) × 100. If your equity is $8,000 and your margin is $2,000 then your margin level is 400%.
When your margin level goes below 100%, that is, when your equity starts to be lower that your margin and your free margin lower than 0, the trading terminal will warn you of shortage of funds. This is called margin call. Under margin call, the terminal will not let you open any new trades.
A margin call will only be visible when logging into your trading account. No email notification will be sent to you upon your account entering margin call.
When the margin level goes below 50%, that is, when the equity starts to be less than half of the margin, the trading terminal will start to close trades automatically, starting with the trade with the biggest loss.
Other things to consider
- We can reduce maximum leverage manually if a trader asks us to do so, however this would increase the Margin for each asset proportionally, e.g. to have a 1:100 leverage on the AUDUSD means assuming a 1:50 leverage on the EURCAD.
- While a hedged position does not require margin, its P&L is calculated based on the BID price for long trades, whereas short trades' P&L are calculated with reference to the ASK price, which means that a hedged position with a significant volume is at risk of triggering a margin stop in case of a sudden spread increase.