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Understanding margin and leverage

Take a position on 70 forex pairs by depositing just a fraction of the full value of your trade.

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Margin

Margin trading allows you to leverage the funds in your account to potentially generate larger profits by depositing just a fraction of the full value of your trade. This means that you can enter into positions larger than your account balance. The downside, however, is that you can also potentially incur significant losses if the trade moves against you.

Margin is a good faith deposit or performance bond. In leveraged trading, the margin amount is held in deposit by us, your platform provider, while the trade is open. Although there is no minimum margin deposit required to open a trading account with OANDA, the margin available in your account will determine the size of the positions you can open.

Remember, when trading on margin, both profit and loss can be magnified. Carefully consider your financial objectives, level of experience and appetite for risk before you begin trading on leverage.

Leverage

Leverage is the reciprocal of margin. For example, 5% margin is the same as 20:1 leverage.

Let’s say you have a USD account with a maximum leverage set to 20:1 and a long 10,000 EUR/GBP open position. The current rate for EUR/USD is 1.1320/1.1321 (the current midpoint rate of EUR/USD is therefore 1.13205).

Your margin used is position size x margin requirement = 10,000 EUR x 5% = 500 EUR.

The margin used in your account currency = 500 x 1.13205 = 566.025 USD.

The maximum leverage allowed per trade in the US is determined by the National Futures Association (NFA) - the regulatory authority in the US. You could choose to limit leverage to lower levels than allowed by the regulators.

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Frequently asked questions

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How can I protect my position when trading on margin?

The OANDA Trade platform supports margin trading, which means you can enter into positions larger than your account balance. One advantage of margin-based trading is that you can leverage the funds in your account and potentially generate large profits relative to the amount invested. The downside is that you have an equal opportunity to incur significant losses in your account. It is a good practice to utilize stop loss orders to limit potential losses when utilizing leverage.

Stop Loss orders are not guaranteed; gaps in market pricing may cause your Stop Loss orders to be filled at a less advantageous price. The Forex orders types page provides more detail on stop losses and other orders.

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How can I calculate when a margin closeout will occur?

You must maintain sufficient margin in your account to support your open positions. When accounts are under-margined, the OANDA Trade platform will automatically initiate a margin closeout, whereby all tradable open positions in the account are automatically closed using our current rates at the time of closing in accordance with OANDA's margin rules.

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