Leverage is essentially the ability to trade a larger position than the money you actually have on your account. For instance, if you have £10,000 on your account but you are using that capital to control a position with a trade value of £1m (that is, 100 times bigger) you have leverage of 100:1.
Leverage gives you the chance to enhance your profit margin, by maximising the return on your capital. With InterTrader you need only put down a small fraction of the full contract value (your initial margin requirement) to open a position. The difference between this amount and the contract value is your leverage ratio. On the major forex pairs you can gain leverage of up to 200:1.
Say you want to buy GBP/USD and the offer price is currently 1.5000. If you buy £1 per pip with InterTrader your full contract value will be £1 x 15,000 = £15,000. But with our standard leverage of 200:1 your margin requirement to open this position is just 0.5% x £15,000 = £75.
You can increase your leverage still further by attaching a stop-loss order to your position. Say you place a stop 10 pips away from your opening level, your margin will be calculated according to the formula:
(standard margin requirement x 50%) + (stop distance x risk per point)
Or in this case:
(£75 x 50%) + (£10 x £1) = £37.50 + £10 = £47.50
So you can control a position worth £15,000 for a margin deposit of just £47.50 (or even less if your stop is tighter). This represents a leverage ratio of £15,000 / £47.50, or 316:1.
Another way to look at this is that, if you had £15,000 on your account, you could buy £316 per pip. Without any leverage, your £15,000 could only support a trade worth £1 per pip. With leverage you can increase the potential return on your capital by a factor of 316.
(Note that, if you’re trading on MT4, the standard margin is 100:1 and margins are not reduced by stop orders: your margin will always be just 1% of your full position value. Find out more about using MT4)
The following table compares trades on the same market with and without leverage, supposing that you buy GBP/USD at 1.5000, and later sell at 1.5054, for a profit of 54 pips.
|Money on account||£15,000||£15,000|
|Risk per point||£316 (stop distance: 10 pips)||£1|
|Notional trade size||£4,740,000||£13,800|
|Increase in pip value||54 pips||54 pips|
You should note that, in maximising the return on your capital, leverage also maximises your potential losses. Also, your initial margin requirement does not represent the full amount you might lose on your position should the market move against you.
In the example above, a loss of 20 pips would equal a loss of just £20 without any leverage, but with a ratio of 316:1 this would come to £6320. You should always take the risk into account before you open any leveraged forex position.