Understanding margin and leverage

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 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.

Whilst OANDA offers different instruments that have different margin requirements, you have full control of the trade size you would like to open and can manage your risk by adjusting your trade size accordingly. The larger the amount of your available funds that you use in a trade, the greater the risk. Experienced traders would not risk all of their funds on any single trade.