Margin Trading is trading financial instruments based on margin which is a guaranteed deposit based on a certain percentage that is requested from clients in order to open a new position. Margin guarantees the coverage of losses made by the client in the case that the market moves against him. Deposits are transferred back to the account when the position is closed or hedged.
Clients are required to maintain a minimum amount of funds for each open position held in their trading account, in accordance with the chosen leverage. These funds are known as Margin Requirements and are considered to be a guarantee and not a cost.
Leverage is defined as borrowed capital, such as margin, used to increase the potential return of an investment. In cases where the client uses leverage for an investment and the market moves in the opposite direction to the client's expectation, the loss on the investment is much greater than what it would have been if the investment had not been leveraged. Leverage magnifies both profits and losses. The higher leverage, the higher the level of risk and the higher possibility of a profitable return or loss.
Once the free margin/available margin of a trading account falls below Margin Call level, the trading account is considered to be on Margin Call. The client is recommended to add new funds to his/her trading account in order to bring the free margin of the trading account to its required level. In cases where the trading account is not supported with additional funds and the free margin falls below the stop out level, the trading account will be stopped out.
Example of how Leverage works:
Your trading capital is10.000EUR
The leverage chosen is 1:100
This means 100*10.000 = 1.000.000EUR
On EURUSD long position opening at 1.2845, position closing at 1.2945
The difference is 0.0100 pips thus 1.000.000*0.0100 = 10.000 USD this is the profit you made.