What is Forex Leverage?

  • Leveraged trading is one of the key advantages behind trading forex. At City Index, leverage, also referred to as margin, allows you to gain a large exposure to the forex markets for a relatively small initial deposit.  

    This means that should the markets move in your favour, your net returns could be much greater than your initial outlay, which would not be the case were you to buy the currency physically. 

    Leverage, however, is a double edged sword so whilst your net returns could be much greater than your initial deposit, so can your losses and here lies the main risk with leveraged trading.

    Volatility in the forex markets can bring ample opportunity to speculate and profit from forex price movements. However, there is always the possibility that your trades could go against you and this could net you a loss. Trading forex carries a higher degree of risk and is not suitable for all investors.

    How leverage works

    Leverage essentially means controlling a large exposure for a small deposit which you select, ranging from 0.25% to 5%, using our ‘Leverage to Suit’ model. 

    At City Index, leverage is worked out as a ratio, for example 50:1 is a ratio equivalent of a margin of 2% (1/50 = 0.02 or 2%). In this example therefore, you would need to have at least 2% of the total exposure of your intended forex position in your account in order to place the trade. 

    The margin required for a position is the amount of funds you must have in your account in order to open and maintain a forex position. 

    Each night you will pay a small financing charge on the exposure of the forex trade including the amount that has been effectively borrowed in order to trade the full position. In this sense, leverage works in a very similar way to how one might buy a house on a mortgage. 

    Your City Index trading account automatically calculates margin in real-time, based on the prices of the currency pair you trade. This means that the margin amount required is affected by changes in the market price, allowing you to gain a greater management and awareness over your margin requirement during your trades. 

    For currency pairs not of your base currency, the margin required will be converted back into your base currency at the prevailing market price for that pair. 

    Leverage to Suit at City Index

    At City Index, we provide a ‘Leverage to Suit’ model for all forex trades, meaning that our clients can select which leverage scale they want to trade with, that best suits their risk and strategy model for that particular trade. Our ‘Leverage to Suit’ model gives City Index forex traders the option to choose between a scale of leverage ratio options, from 20:1 (5%) to 400:1 (0.25%). 

    Our ‘Leverage to Suit’ model has been created to provide you with the greatest trade and risk flexibility. 

     

    Trading Leverage  Equivalent Margin  Required Risk Persona 
    20:1  5%  Low Risk 
    25:1  4%   
    50:1  2%   
    100:1  1%   
    200:1  0.5%   
    250:1  0.4%   
    300:1  0.33%   
    400:1  0.25%  High Risk 



    Margin Trade Example

    Let’s say GBP/USD is trading at 1.6292/1.6294. 

    You decide to place a trade to sell £100,000 GBP/USD at 1.6292. You decide to trade with a leverage ratio of 50:1. 

    The initial deposit required in order to place the trade is £100,000/50 = £2,000. 

    The margin must be converted into dollars to correctly reflect the risk. 

    GBP 2,000 x 1.6293 (we take the mid-rate of the pair traded 1.6292 / 1.6294) = $3258.60.

    The initial margin required to place this trade would be GBP£2,000 or US$3258.60.

    Please be aware that this margin is marked-to-market in real time for the life of the trade, which is standard procedure in retail forex markets. 

    Therefore you need to be aware that the margin requirement will effectively fluctuate in tandem with the forex price. If the GBP/USD mid-price increased theoretically to 1.6400, the margin required to maintain the trade would be GBP £2,000 x 1.6400 or US$3280. If the price fell to 1.5800, the required margin would decrease to US$3160 accordingly.  

    Margin Close Out 

    At City Index we take managing risk very seriously and strive to help to protect you from suffering large losses should the market go against you. This is why we have created ‘Margin Close Out’.

    Margin Close Out is a policy designed to help you to limit any losses on your account before they accelerate. Margin Close Out dictates that should your Margin Level Indicator fall below your Margin Close Out Level, (which varies depending on your account), our systems may automatically close losing positions at the best price available at the time before any losses accelerate and until your margin level indicator returns to ‘Positive Equity.’ Please be aware that during times of high volatility market prices can gap and this may affect the prices at which your positions are closed out.  

    Your City Index account will have your Margin Level Indicator visible when you log in to our trading platform. Your Margin Level Indicator represents the level of cover associated with your open positions. It displays one of the three scenarios listed below: 

    • Scenario 1: If your Margin Level Indicator is greater than 200%, this will show as > 200%. This means that you have more than double the amount of funds needed to keep your positions open. 
    • Scenario 2: If your Margin Level falls below 200%, the margin level will display a percentage between 100% and 200%, depending on the ratio. 
    • Scenario 3: If your Margin Level is at or below the Margin Close Out Level and you do not have enough funds (including open positions’ profits or losses) in your account to cover your Total Margin. Consequently, depending on your Margin Close Out level, automatic closure of your open positions may be triggered. A warning symbol will be displayed next to the Margin Level if it drops below the Close Out Level.

     

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