Last update 2020.10.19
The concept of margin and leverage is ubiquitous in forex trading. What exactly are leverage and margin? The short answer is these two terms are each different sides of the same coin, below we will go into further detail, starting with margin.
What you will learn here
- Understanding leverage and margin in forex
- How to use leverage to take advantage of forex trading
- Cautions regarding the use of leverage and margin in trading
- How to use AI to trade forex without leverage
- What are the best forex brokers to trade
The concept of margin
In summary, the margin is like a deposit requirement that becomes locked up when making a purchase, such as when buying real estate, but in this case, it is to open a forex trade.
The down payment in a real estate purchase might only be 10% of the value of the property, thus the margin requirement can be thought of as a percentage down payment towards the overall transaction value.
Margin in forex markets
In financial markets, this concept of margin is similar, except that if the value of the trade changes rapidly, you might need to deposit an additional margin in the broker account to avoid having your position liquidated, known as a margin call.
Leverage simply measures how far your margin can go in terms of controlling transaction sizes.
A trader looking to purchase 10,000 units of the GBP/JPY currency pair at an exchange rate of 143.21 Japanese Yen for each unit of British Pounds, and at a margin requirement of 10%, will have to have to use the equivalent of 143,210 JPY as margin, based on the trade value of 1,432,100 JPY (equal to 10,000 British pounds). In other words, the trader needs at least 1000 GBP to purchase 10,000 GBP, relative to the other currency. This is a form of 10% margin, equal to 10:1 leverage.
Below is a helpful list of various margin levels and their associated degree of leverage:
- 100% margin = zero leverage
- 50% margin = 2:1 leverage
- 25% margin = 4:1 leverage
- 20% margin = 5:1 leverage
- 10% margin = 10:1 leverage
- 5% margin = 20:1 leverage
It’s crucial to remember that the lower the margin requirement and the higher the associated degree of leverage, the higher the risk is of losing all your money.
Leverage is comparable to credit in forex
Leverage in forex trading is like a credit mechanism that allows forex traders to take positions, whether buying or selling, which is of significantly higher value than the funds they have available in their account. Leverage also provides a is a solution to hedge an amount of your portfolio by using only a fraction of the available cash balance. Most of the Brokers display that information on their trading platform, you can see some examples here.
The amount of available leverage varies widely among forex brokers, and you can have a very different result if your margin is 50:1 compared to 400:1 in the forex market. A margin requirement of 0.25% (which is 400:1 leverage) provides eight times more leverage when it comes to potential earnings or losses, compared to a 2% margin (which is 50:1 leverage).
In practice, leverage reflects the fact that a broker lends investment capital to traders who are in effect borrowing the leverage amounts, using just their margin deposit as collateral. Therefore, this mechanism allows you to reap larger profits if you achieve good performance, or larger losses if you don’t manage your forex trading properly.
Overall, using leverage is not for everyone as the potential losses it can generate can be significant. Extreme caution is required when using leverage, along with a good understanding of the margin requirement level, as that will determine the degree of leverage.
Leverage as a notion of risk
We can think about leverage as a notion of risk because smaller margin requirements mean bigger degrees of leverage, which causes more sensitivity to risk when the underlying price changes. Some positions can even lead to losses larger than the total amount available in the trader’s account, causing a negative balance.
One useful tip is choosing a forex broker that has a mechanism automatically close positions to prevent bigger losses when your available cash reaches zero. It can minimize the risk of a negative balance. For reasons such as these related to the risk of using leverage, it can be prudent to use little or no leverage, depending on your trading strategy and goals.
You can learn more about leverage and margin in other texts here on the Wiseinvest forex Academy page.
The best way to trade forex
There are two ways to invest with our AI in forex, without concern about calculating margin and leverage in trading.
1. Automated with AI-Trading. Check out the 3 steps to trade automated with our AI.
By trading forex automated with AI, you will save time and improve your performance without monitoring the market and managing trading platforms.
With Automated AI trading you do not need MT4 / MT5 and other trading platforms to invest in forex. All forex trades are automatically placed into your broker account every time that our AI system identifies a new worthy trading opportunity. You can monitor the AI trading performance in real-time directly on our dashboard.
Automated AI trading benefits
- Setup in 3 minutes.
- Totally hands-off, from anywhere.
- Invest from just $1.
- APY of 40% over the past 13 years*.
- Lightning-fast execution & no slippage.
- No commissions, no management fees.
- Portfolio with 40 different automatic strategies.
- No MT4/MT5 or other platforms required.
- Test with a risk-free practice account.
- Trading results directly on our dashboard.
Don’t you have a broker account yet? Our AI is integrated to trade automated with the broker Oanda. Click here to open an account.
2. Manually with AI forex signals.
Wiseinvest also provides AI forex signals that perfectly fit into MT4, MT5, and any trading platform. To trade with our AI forex signals, you must simply copy the data you receive from each real-time signal into any forex brokerage account of your choice.
There are five unique variables for each AI signal, and each must be copied exactly, to match the performance of the signal as close as possible.
Each AI forex signal alert consists of the following five data points:
- Symbol (forex pair)
- Direction (long or short)
- Position size (number of units or lots)
- Take profit (price level to exit with maximum gain)
- Stop loss (price level to exit with maximum loss)
Check out how to trade with our AI forex signals.
- Subscribe to a Wise-Plan.
- Open a Brokerage account. Check this article about the best forex Brokers.
- Set an amount and a position size on our Wiseinvest dashboard.
- Our AI will send you real-time trading alerts by email and Telegram.
- Copy the signals and paste into your Brokerage account.
All forex signals are sent every time that our AI trading system identifies a new trading opportunity. Our trading strategies are developed on a variety of time frames such as 4 and 8 hours.
Wiseinvest AI forex signals are Market Orders and you do not need the entry price. You can copy each signal while it is available on our dashboard. We do this way to assure that traders will just place signals while they are good to be traded.
You can trade forex with our free forex signals clicking here, or with our Premium subscription that provides you unlimited AI signals and automated AI trading in partner brokers. Whether you are a beginner or a professional forex trader, our AI trading system can help you save time and improve your trading performance. Get started with free AI.
When investing through Wiseinvest automated AI trading or AI forex signals, you do not need to calculate pips and change the leverage in your forex broker account. Learn more about leverage in forex trading by clicking here.
What is the AI performance in forex trading?
The Win Rate of our AI varies according to the period and can reach up to 95%. The performance is based on the efficient frontier measurement metric, which means that our model is profitable whenever the Win Rate is greater than 60%. All strategies of our AI trading system seek stable returns and sufficient results to achieve an average return of 40% per year (APY), without the use of high leverages.
We understand that what matters in forex trading is the final result. Thus, the investor needs to consider that Win Rate is not always the best metric to measure performance in forex, as other signal providers disclose. For instance, out of 100 trades, only 1 trade may be enough loss to make the 99 trades not profitable. In this case, the Win Rate would be 99%, but the final result would be unfeasible (negative).
We focus on the return of 40% of APY and not just on Win Rate.
It is essential to observe that forex brokers may charge spreads, commissions, and overnight fees in your trading account, and these factors can affect the AI performance. You can check our forex trading track record to understand more about AI trading performance by clicking here.
How much do I need to trade forex with AI?
You can start in forex trading with free AI signals or an AI trading account and deposit just $1 in the broker. It is also possible to test using a risk-free practice account with our AI trading system. However, to do efficient risk management in real accounts, we suggest you start from at least $100. Notice that some forex brokers require different initial deposits to trade forex.
What is the trading strategy of our AI?
Our AI strategy is the combination of different AI trading systems, with more than 100 features, that define 40 different strategies which simultaneously consider: Quotes of the 28 forex pairs, Supports & Resistances in different time frames, Trends and Counter-trends, Cross-indicators, Index of each pair, Economic Calendar, Investors Sentiment.
Our AI analyzes those fundamental, technical, and sentiment factors that affect forex trading, and all criteria are evaluated in real-time using different weights. After completing the analysis, the choice of the signal emission strategy is made considering the increased likelihood of short-term profit and the amount available for investment.
Using technical analysis, our algorithm considers not only the patterns of various trends, including support and resistance levels and cross-indicators, but our AI is also able to create its own real-time index for each currency pair, that is used to identify what is the best direction and target.
In relation to fundamental analysis in forex, the AI makes a correlation within the economic calendar to find news data that can affect specific currency pairs.
- Smaller margin percentage requirements mean an increased degree of leverage and more chances to make greater returns, but it will also increase the risk of greater losses.
- By subscribing to Wiseinvest automated AI trading or AI forex signals, traders will not need to analyze which leverage to use, because our signals have a risk management calculator. The AI trading system can automatically invest for you and calculate the right leverage in real-time.
There is no such thing as certainty in forex trading, but you can do better with the right education and information. Furthermore, WiseInvest leverages Artificial Intelligence to add value to our Wise Signals subscription service.
Margin and leverage in forex trading: Did you like what you read? Learn more about the types of investment markets here.
Disclaimer: Forex and Contracts for Difference (CFDs) are complex instruments and come with a high risk of losing money due to leverage. Forex trading is not suitable for everyone. You should consider whether you understand how forex and CFDs work and whether you can afford to take the high risk of losing your money.
The forex brokerages displayed shall disclaim the overall performance of traders in their platforms. Oanda warns that 76.8% of retail forex traders lose money trading CFDs. XTB warns that 80% of retail forex traders lose money trading CFDs. FXCM warns that 74.74% of retail forex traders lose money trading CFDs.
The performances aforementioned are not related to Wiseinvest AI forex trading and AI forex signals system. You can check the performance of our AI forex system on our dashboard.