Leverage and margin amounts
The levels of leverage and margin amounts available to you is also a crucial factor in your decision.
Leverage is a feature of some trading instruments. It means that the majority of your position size is, essentially, borrowed from your broker. When opening a forex trade, you’ll put down a percentage of its value, known as margin, and your broker will put up the rest.
It also means that your initial outlay to open a trade is only a fraction of the position’s actual size, but both profits and losses are calculated based on the trade’s full value. This means both profits and losses can substantially outweigh your margin amount.
Let’s look at an example – say you want to use spread bets to trade the GBP/USD pair. You want to open a trade worth £1000. With us, you’d have a margin rate of 3.33%, meaning you’d only need to put up £33.30 (33% of £1000) to open that position. However, both your profits and losses would be calculated on the total £1000 position size.
So, while you’d only pay a £33.30 margin amount to trade £1000 per point on GBP/USD, you’d gain £1000 for every point the currency pair moves in your favour – and lose £1000 for every point the market moves against you.
This translates into a leverage ratio of roughly 1:30, which is in line with UK financial regulations. It means that your profits and losses could be 33 times bigger than the amount you paid to open your position.
This is what makes the leverage ratio of the forex broker you’re trading with crucial. A high amount of leverage means you can make far more with a small amount of capital than you could otherwise. However, it also means you’re at risk of losses far outweighing your position size, and you’d forfeit that entire amount if your prediction is incorrect.
We offer retail forex traders a more manageable 1:30 leverage ratio. Some forex brokers have a leverage ratio of 100 or even 1000 times the amount of your margin – but this puts you at risk to enormous losses, which could cripple your trading strategy.
We also, as per UK regulation, give you negative balance protection.2 This means you can’t lose more than the equity available in your account. If your balance does go negative, we’ll bring it back up to zero at no cost to you.
Here are some more margin and leverage specifics on some of our most popular currency pairs:
